Reference no: EM13146438

Suppose that on Jan 1 you lend $50,000 to a bank (deposit $50,000 in a savings account). The savings account is paying 4% annual interest rate paid quarterly. a.) How much interest will be paid on April 1? What is the new account balance? (Hint: you will receive only a quarter of the annual interest) b.) How much interest is paid on July 1? What is the new account balance? c.) How much interest is paid on Oct 1? What is the new account balance? d.) How much interest is paid on Jan 1? What is the new account balance? e.) Use the simple interest rate formula: PV = FV/(1+i) to calculate the interest rate that you actually received. In banking jargon the 4% shown above is called the interest “rate” and what you are calculating here is called the “yield”. f.) The difference between the interest “rate” and the “yield” is due to compounding; that is, how often the interest is paid. Since it is paid in the spring the July interest payment includes interest paid on the April interest. If the interest is paid more often, say monthly, will the yield be higher or lower or unchanged? g.) Calculate the yield if interest is compounded monthly. h.) Calculate the yield if interest is compounded weekly. i.) Calculate the yield if interest is compounded daily. j.) Bonus: Is there a simple way of calculating this, a formula? Can you figure it out? k.) Calculate the yield if interest is compounded continuously. Is his higher or lower than when quarterly, monthly, weekly, daily compounding is used?