Different compounding periods-different types of investments

Assignment Help Financial Management

Reference no: EM131838939

Different compounding periods, are used for different types of investments. In order to properly compare investments or loans with different compounding periods, we need to put them on a common basis. In order to do this, you need to understand the difference between the nominal interest rate (INOM) and the effective annual rate (EAR). The (periodic/effective/nominal) interest rate is quoted by borrowers and lenders, and it is also called the annual percentage rate (APR). If the compounding periods for different securities is the same, then you (can/cannot) use the APR for comparison. If the securities have different compounding periods, then the (Iper/EAR/Inom) must be used for comparison.

Here, M is the number of compounding periods per year and INOM/M is equal to the periodic rate (IPER). If a loan or investment uses (quarterly/semiannua/lannual) compounding, then the nominal interest rate is also its effective annual rate. However, if compounding occurs more than once a year, EAR is (less than/higher than/equal to) INOM.

Quantitative Problem: Bank 1 lends funds at a nominal rate of 9% with payments to be made semiannually. Bank 2 requires payments to be made quarterly. If Bank 2 would like to charge the same effective annual rate as Bank 1, what nominal interest rate will they charge their customers? Round your answer to three decimal places. Do not round intermediate calculations.

Reference no: EM131838939

Questions Cloud

Perform legal work while traveling : Do the Model Rules of Professional Conduct require an attorney to perform legal work while traveling?

List three goals the team is trying to achieve : Write a memo to your supervisor in which you:Describe how you will form a team to develop a training program.Identify who will be on your team and who will lead

Evaluate the diverse roles of us judges : Write a 1,050- to 1,400-word paper in which you discuss and evaluate the diverse roles of U.S judges, prosecutors, defense counsel, and other courtroom.

Why does the create components method of filled frame call : Why does the create Components method of Filled Frame call add(panel), whereas the main method of Filled Frame Viewer calls frame.add(panel)?

Different compounding periods-different types of investments : Different compounding periods, are used for different types of investments. In order to properly compare investments or loans with different compounding periods

Contract is important in the conveyancing transaction : "The law of contract is important in the conveyancing transaction as it regulates not only the relationship between the conveyancer

Write a summary to your office manager informing him : Write a 350- to 700-word summary to your office manager informing him or her of the advantages of using electronic health records.

Define liability of foreignness and regionalism : The discussion assignment provides a forum for discussing relevant topics for this week based on the course competencies covered.

Elements affected the foreseeability of the disaster : Include details from the narratives above, any additional research, and your own insights into how the disaster might have been foreseen by those responsible.

User Account

All Pages