annual interest rate
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The solution discusses what effective annual interest rate is this equivalent to.
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1. Question 1
A financial institution charges 1.86% per quarter on credit purchases. What effective annual interest rate is this equivalent to?
Effective annual interest rate is
We will use the following formula:
EIR= (1+i)^m*n -1
EIR= Effective Interest rate, m= number of compounding per year, n= number of years, i= Annual nominal rate of interest
Here i=1.86%, m=4, n=1, EIR=?
EIR= 7.65%
2. Question 2a
Calculate the future worth at t=10 for a deposit of $10,000 now, earning a nominal rate of 7% compounded monthly.
Here we have to find out the compounded value of lumpsum
P=present value, F= Future value r= rate of interest n=duration
F=P*(1+r)^n
P= 100, Mothnly interest rate= r= 7%/12, n=10*12=120 months
$20,096.61 ...
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