Corporate Finance: A Focused Approach (mindtap Course List)
7th Edition
ISBN: 9781337909747
Author: Michael C. Ehrhardt, Eugene F. Brigham
Publisher: South-Western College Pub
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Textbook Question
Chapter 4, Problem 19P
Universal Bank pays 7% interest, compounded annually, on time deposits. Regional Bank pays 6% interest, compounded quarterly.
- a. Based on effective interest rates, in which bank would you prefer to deposit your money?
- b. Could your choice of banks be influenced by the fact that you might want to withdraw your funds during the year as opposed to at the end of the year? In answering this question, assume that funds must be left on deposit during an entire compounding period in order for you to receive any interest.
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Bank A pays 2% interest compoundedannually on deposits, while Bank B pays 1.75% compounded daily.a. Based on the EAR (or EFF%), which bank should you use?b. Could your choice of banks be influenced by the fact that you might want to withdraw your funds during the year as opposed to at the end of the year? Assume that your funds must be left on deposit during an entire compounding period in order to receive any interest.
The Bank pays $1,200 in a bank deposit after a period of 12 years at an annual interest rate of 6.5%
How much should you deposit in your bank account now
Future Value ?
Discount Rate/Period ?
No. of Periods ?
Present Value ?
Do the relevant calculations so you can indicate which you prefer: a bank account that pays 5.8% per year (EAR) for 3 years
or
a. an account that pays 2.6% every 6 months for 3 years?
b. an account that pays 7.6% every 18 months for 3 years?
c. an account that pays 0.58% per month for 3 years?
(Note: Compare your current bank EAR with each of the three alternative accounts. Be careful not to round any intermediate
steps less than six decimal places.)
If you deposit $1 into a bank account that pays 5.8% per year for three years, the amount you will receive after three years is
$
(Round to five decimal places.)
Chapter 4 Solutions
Corporate Finance: A Focused Approach (mindtap Course List)
Ch. 4 - Prob. 1QCh. 4 - Prob. 2QCh. 4 - An annuity is defined as a series of payments of a...Ch. 4 - If a firms earnings per share grew from 1 to 2...Ch. 4 - Prob. 5QCh. 4 - Prob. 1PCh. 4 - Prob. 2PCh. 4 - Prob. 3PCh. 4 - Prob. 4PCh. 4 - Prob. 5P
Ch. 4 - Prob. 6PCh. 4 - An investment will pay 100 at the end of each of...Ch. 4 - You want to buy a car, and a local bank will lend...Ch. 4 - Find the following values, using the equations,...Ch. 4 - Prob. 10PCh. 4 - Prob. 11PCh. 4 - Find the future value of the following annuities....Ch. 4 - Prob. 13PCh. 4 - Prob. 14PCh. 4 - Prob. 15PCh. 4 - Prob. 16PCh. 4 - Prob. 17PCh. 4 - Prob. 18PCh. 4 - Universal Bank pays 7% interest, compounded...Ch. 4 - Prob. 20PCh. 4 - Prob. 21PCh. 4 - Prob. 22PCh. 4 - A mortgage company offers to lend you 85,000; the...Ch. 4 - Prob. 24PCh. 4 - Prob. 25PCh. 4 - Prob. 26PCh. 4 - Prob. 27PCh. 4 - Prob. 28PCh. 4 - Prob. 29PCh. 4 - Your company is planning to borrow 1 million on a...Ch. 4 - It is now January 1. You plan to make a total of 5...Ch. 4 - Prob. 32PCh. 4 - Prob. 33PCh. 4 - You want to accumulate 1 million by your...Ch. 4 - Prob. 1MCCh. 4 - Prob. 2MCCh. 4 - Prob. 3MCCh. 4 - Prob. 4MCCh. 4 - Prob. 5MCCh. 4 - Prob. 6MCCh. 4 - Prob. 7MCCh. 4 - Prob. 8MCCh. 4 - Prob. 9MCCh. 4 - Prob. 10MCCh. 4 - Prob. 11MCCh. 4 - Prob. 12MCCh. 4 - Prob. 13MC
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- lu that he accept? Problem 7 EFFECTIVE VERSUS NOMINAL INTEREST RATES. Bank A pays 4% interest compounded annually on deposits, while Bank B pays 3.5% compounded daily. a. Based on the EAR (or EFF%), which bank should you use? b. Could your choice of banks be influenced by the fact that you might want to withdraw your funds during the year as opposed to at the end of the year? Assume that your funds must be left on deposit during an entire compounding period in order to receive any interest. Page 35 of 161arrow_forwardIf you deposit OMR 27177 in your account in a bank. Suppose the bank pays 12% compound interest quarterly. Calculate value of your money in 4 years Select one: a. 166607.80 b. 43611.11 c. 16935.81 d. 42749.42 e. All the given choices in this question are not correctarrow_forwardA company that uses a bill facility to provide finance for a period of two years: A. is exposed to interest-rate risk B. will not be required to make any payment until the end of the facility. C. will issue bank bills that mature in two years' time. D. will initially receive the bills' face value. E. all of these.arrow_forward
- May I ask for an explanation and solution to the question for a better understanding. Thank you! 11. You plan to invest an amount of money in a certificate of deposit (CD) at your bank. The stated interest rate applied to the CD is 12%, compounded monthly. How much must you invest if you want the balance in the CD account to be P8,500 in 2½ years? a. P143,302.66 b. P11,941.89 c. P6,306.34 d. P11,302.14arrow_forwardA depositor currently has $6,000 and plans to invest it in an account that accrues interest continuously. What interest rate must the bank pay if the depositor needs to have $10,000 in four years?arrow_forwardThe local bank is currently offering a new investment product, where deposits earninterest according to the following scheme:• An interest rate of r is applied on the 15th day of each month.• A bonus interest rate of t is applied on the 30th day of every odd month. (Theseare the months of January, March, May, July, September, and November.)1. Suppose that you want to deposit an amount of P dollars into the account twice:on January 1 and August 1 in 2023. If you want the value of your investment tobe S by April 30, 2024, express P in terms of S, r, and t.(Note that r and t are not APRs.)2. What is the effective annual rate of the above compounding scheme?arrow_forward
- Bank America offers a stated annual interest rate of 5.0 percent, compounded quarterly, while Bank USA offers a stated annual interest rate of 5.10 percent, compounded monthly. In which bank should you deposit your money?arrow_forward(a) Explain the differences between annual percentage rate (APR) and effective annual rate (EAR). (b) Phoebe is considering selling her entire stock holding and depositing the money ($500,000 in total) into a bank account. She has obtained the following information about two banks: Bank X: 12% APR with monthly compounding Bank Y: 13% APR with semi-annual compounding (i) Based on the comparison of the yearly rate of return, which bank would Phoebe prefer? Provide supporting calculations. (ii) How much money will Phoebe have in Bank X’s account five years from now if the money remains in the account during the period? Provide supporting calculations.arrow_forwardA bank is considering offering a loan of $100,000 to a client. If the loan is not offered, then the bank invests the $100,000 receives a sure payoff from the investment of $200 (i.e., receives $100,200 at the end of the year). Prior to a decision of whether or not to offer the loan, the bank can run a credit analysis on the client that returns one of two possible predictions: (1) the client will default on the loan in which case the bank would lose $100,000, (2) the client will pay back the loan with interest in which case the bank receives a payoff of $6,000 (i.e., receives $106,000 at the end of the year). The probability that the credit analysis will return the first prediction (client defaults) is 1%. What is the EVPI?arrow_forward
- A bank pays 5% with daily compounding on its savings accounts. Should it advertisethe nominal or effective rate if it is seeking to attract new deposits?arrow_forwardHow much do you have to deposit now with a second deposit in the amount of $700 at the end of the first year) so that vou will be able to withdraw $150 at the end of the second year through the fourth year, and $400 at the end of the fifth and sixth year, if the bank pays you 4% annual interest on your balance Use factor method and draw a cash flow diagramarrow_forwardIf you deposited P1,000 a couple of years ago in a bank that pays the interest bimonthly. After that, the money in the account had grown to P1,800. Determine the nominal interest rate and the effective interest rate.arrow_forward
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