Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN: 9781337395250
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Textbook Question
Chapter 5, Problem 27P
EFFECTIVE VERSUS NOMINAL INTEREST RATES Bank A pays 2% interest compounded annually 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.
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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 161
Allied Bank pays 4% interest compounded annually on deposits, while bonkers Bank pays 3.5% compounded daily.a. Based on the EAR which bank should you use?b. Could your choice of banks be influenced by the fact that you might want to with draw 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.
Suppose that you owe $2,000 on a credit card that charges 18% APR and you pay either the minimum 10% or $20, whichever is higher, every month. How long will it take you to eliminate the debt? Assume that the bank uses the previous-balance method to calculate your interest, meaning that the bank does not subtract the amount of your payment from the beginning balance but charges you interest on the previous balance.
Chapter 5 Solutions
Fundamentals of Financial Management (MindTap Course List)
Ch. 5 - Prob. 1QCh. 5 - Explain whether the following statement is true or...Ch. 5 - If a firms earnings per share grew from 1 to 2...Ch. 5 - Prob. 4QCh. 5 - Prob. 5QCh. 5 - The present value of a perpetuity is equal to the...Ch. 5 - Banks and other lenders are required to disclose a...Ch. 5 - What is a loan amortization schedule, and what are...Ch. 5 - FUTURE VALUE If you deposit 2,000 in a bank...Ch. 5 - Prob. 2P
Ch. 5 - FINDING THE REQUIRED INTEREST RATE Your parents...Ch. 5 - TIME FOR A LUMP SUM TO DOUBLE If you deposit money...Ch. 5 - TIME TO REACH A FINANCIAL GOAL You have 33,556.25...Ch. 5 - FUTURE VALUE: ANNUITY VERSUS ANNUITY DUE Whats the...Ch. 5 - PRESENT AND FUTURE VALUES OF A CASH FLOW STREAM An...Ch. 5 - LOAN AMORTIZATION AND EAR You want to buy a car,...Ch. 5 - Prob. 9PCh. 5 - Prob. 10PCh. 5 - GROWTH RATES Sawyear Corporations 2017 sales were...Ch. 5 - EFFECTIVE RATE OF INTEREST Find the interest rates...Ch. 5 - Prob. 13PCh. 5 - Prob. 14PCh. 5 - PRESENT VALUE OF AN ANNUITY Find the present...Ch. 5 - Prob. 16PCh. 5 - EFFECTIVE INTEREST RATE You borrow 230,000; the...Ch. 5 - Prob. 18PCh. 5 - FUTURE VALUE OF AN ANNUITY Your client is 26 years...Ch. 5 - Prob. 20PCh. 5 - EVALUATING LUMP SUMS AND ANNUITIES Kristina just...Ch. 5 - Prob. 22PCh. 5 - FUTURE VALUE FOR VARIOUS COMPOUNDING PERIODS Find...Ch. 5 - Prob. 24PCh. 5 - FUTURE VALUE OF AN ANNUITY Kind the future values...Ch. 5 - PV AND LOAN ELIGIBILITY You have saved 4,000 for a...Ch. 5 - EFFECTIVE VERSUS NOMINAL INTEREST RATES Bank A...Ch. 5 - Prob. 28PCh. 5 - BUILDING CREDIT COST INTO PRICES Your firm sells...Ch. 5 - Prob. 30PCh. 5 - REQUIRED LUMP SUM PAYMENT Starting next year, you...Ch. 5 - REACHING A FINANCIAL GOAL Six years from today you...Ch. 5 - FV OF UNEVEN CASH FLOW You want to buy a house...Ch. 5 - AMORTIZATION SCHEDULE a. Set up an amortization...Ch. 5 - Prob. 35PCh. 5 - NONANNUAL COMPOUNDING a. You plan to make five...Ch. 5 - Prob. 37PCh. 5 - Prob. 38PCh. 5 - Prob. 39PCh. 5 - REQUIRED ANNUITY PAYMENTS A father is now planning...Ch. 5 - Prob. 41SPCh. 5 - Prob. 42IC
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- Suppose that you owe $2500 on a credit card that charges 18% APR and you pay either the minimum, 10% or $20 whichever is higher, every month. How long will it take you to eliminate the debt?. Assume that the bank uses the previous balance method to calculate your interest, meaning that the bank does not subtract the amount of your payment from the beginning balance but charges you interest on the previous balance.arrow_forwardDo the relevant calculations so you can indicate which you prefer: a bank account that pays 5.7% per year (EAR) for 3 years or a. an account that pays 2.3% every 6 months for 3 years? b. an account that pays 7.1% every 18 months for 3 years? c. an account that pays 0.29% 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 5.7% per year for three years, the amount you will receive after three years is $ (Round to five decimal places.)arrow_forwardThe 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 ?arrow_forward
- Suppose you borrow from a bank $1,756.06 today (t=0). You agree to pay back $3,637.64 in 4 years (t=4). The interest rate (%) that the bank charge you is closest to ________%. Input your answer without the % sign and round your answer to two decimal places.arrow_forwardIf a bank compounds savings accounts monthly, the effective annual rate is greater than the nominal rate Group of answer choices True Falsearrow_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_forward
- Bank A pays 2% interest compounded annually on deposits, while Bank B pays 1.75% compounded daily. a. Based on the EAR (or EFF%), which bank should you use? I. You would choose Bank A because its EAR is higher. II. You would choose Bank B because its EAR is higher. III. You would choose Bank A because its nominal interest rate is higher. IV. You would choose Bank B because its nominal interest rate is higher. V. You are indifferent between the banks and your decision will be based upon which one offers you a gift for opening an account. I 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. II I. If funds must be left on deposit until the end of the compounding period (1 year for Bank A and 1 day for Bank B), and you think there is a high probability that you will make a…arrow_forwardA bank that provides overdraft protection charges 12 percent for each $100 (or portion of $100) borrowed when an overdraft occurs. a. What amount of interest would the customer pay for a $188 overdraft? (Assume the interest is for the full amount borrowed for whole year.) b. How much would be saved by using the overdraft protection loan if a customer has three overdraft charges of $30 each during the year?arrow_forwardThe rates offered by a bank on deposits between $10,000 and $24,999 are shown in the following table: Term 180 to 269 days 270 to 364 days Rate. 3.15% 3.45% How much more will an investor earn from a $10,000 investment in a 364-day GIC than from two consecutive 182-day GICS? Assume that the interest rate on 180- to 269-day GICS will be the same on the renewal date as it is today. Remember that both the principal and the interest from the first 182-day GIC can be invested in the second 182-day GIC. (Use 365 days a year. Do not round the intermediate calculations. Round your final answer to 2 decimal places.) An investor will earn $ morearrow_forward
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