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Inflation, rate of return
Answers questions on annual compound inflation rate, dollar cost of investment , nominal interest rate, real interest rate, realized real interest rate, current price of the bond, realized annual rate of return, compounded annual rate of return on investment
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Time Value of money
What is the EFF% for a nominal rate of 12%, compounded semiannually? Compounded quarterly? Compounded monthly? Compounded daily?
i. Will the effective annual rate ever be equal to the nominal (quoted) rate?
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Calculating effective and nominal interest rates
521381 Effective and Nominal Annual Interest 1. What is the effective interest rate if nominal annual interest is 14.8% computed monthly?
2. What is the effective interest rate if nominal annual interest is 12.68% computed continuously?
3.
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A credit card account charges 20% as a nominal annual interest rate compounded monthly.
This account earns a nominal annual rate of 8%, but compounds interest quarterly at the rate of 2%. If all interest payments are reinvested in the same accounts, what will be your balance in ten years?
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Effective annual interest rates
164131 Effective Annual Interest Rates Bank A offers to lend $10,00 at a nominal rate of 7%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year.
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What are the nominal and effective annual interest rates for the two alternative payment plans from the orthodontist?
= 14.36%
The effective annual rate takes into account the monthly compounding
Effective annual rate = (1+1.20%)^12-1 = 15.34% The solution explains how to calculate the nominal and effective annual interest rate.
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Rate of inflation, real interest rate, tax-free investment
If your tax rate is 30%, which opportunity provides the higher after-tax interest rate? 22. If the rate of inflation is 5%, what nominal interest rate is necessary for you to earn a 3% real interest rate on your investment?
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Measuring Inflation
365846 Measuring Inflation In the United States of Albion, expected inflation is 5% and the real interest rate is 2%.
(a) What is the nominal interest rate?
(b) If inflation turns out to be 10% instead, what is the ex post real interest rate?
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Nominal and effective annual interest rate
We can write
4,000 = 139.68 X PVIFA (rate, 36)
We can solve this equation in excel using the RATE function
The monthly rate comes to 1.29%
The nominal annual rate = 1.29 X 12 = 15.52%
The effective annual rate will take into account the monthly compounding
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Lock Box, Cash Conversion Cycle, Interest rate
The total cash freed up is
Reduction in time X checks per day X average amount of check
Total cash freed up = 1.5 X 300 X 800 = $360,000
On this cash we can save the interest at 7%
Annual savings = 360,000X7% = $25,200
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