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Homework answers / question archive / 1)A bank pays interest monthly with an EAR of 6
1)A bank pays interest monthly with an EAR of 6.17%. What is the periodic interest rate applicable per month?
| a. |
0.50%. |
|
| b. |
0.42%. |
|
| c. |
0.48%. |
|
| d. |
0.55%. |
|
| e. |
0.52%. |
2)
A bank pays interest monthly with an EAR of 6.17%. What is the periodic interest rate applicable per month?
| a. |
0.50%. |
|
| b. |
0.42%. |
|
| c. |
0.48%. |
|
| d. |
0.55%. |
|
| e. |
0.52%. |
3)
Stanley Hart invested in a state government bond that promised an annual yield of 6.7 percent. The bond pays coupons twice a year. What is the effective annual yield on this investment?
| a. |
6.81% |
|
| b. |
3.35% |
|
| c. |
9.4% |
|
| d. |
8.5%. |
|
| e. |
6.70% |
1)
We know that,
EAR = (1 + monthly rate)^number of months - 1
0.0617 = (1 + monthly rate)^12 - 1
Monthly Rate = 0.50% Answer
The option A is correct.
Kindly do inform me incase you have any queries.
2)
Effective annual rate = (1 + Nominal rate / Compounding frequency)Compouning frequency -1
6.17% = (1 + Nominal rate / 12)12 - 1
1.0617 = (1 + Nominal rate / 12)12
(1.0617)(1/12) = (1 + Nominal rate / 12)
1.0050 = (1 + Nominal rate / 12)
0.005 = Nominal rate / 12
Nominal rate = 6%
Periodic interest rate = Nominal rate / Compounding frequency
Periodic interest rate = 6% / 12
Periodic interest rate = 0.5%
3)
Effective Annual Rate = (1 + r/2)² - 1
Effective Annual Rate = (1 + 0.067/2)² - 1
Effective Annual Rate = 6.81%
