Answered: (a) Explain the differences between…

Business

Finance

(a) Explain the differences between annual percentage rate (APR) and effective annual rate (EAR).

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter4: Time Value Of Money

Section: Chapter Questions

Problem 1hM

See similar textbooks

Related questions

Q: A father wants to set up a bank account that will pay his daughter $18,000 at the end-of-quarter…

A: It is assumed that the interest rate per quarter is 2%.

Q: Molly Hamilton deposited $60,000 at Bank of America at 16% interest compounded quarterly. What is…

A: Given, Rate = 16% p.a. compounded quarterly Amount Deposited = $60000

Q: Exercise 1. Compute the annual interest, total interest and the amount to be received or paid at the…

A: Simple interest is computed by multiplying principal with rate of interest and no. of years.SI = A *…

Q: John deposited P500,000 on his bank account. Due to an emergency, he withdrew P350,000 after 3 years…

A: Amount = P 500,000 Interest rate = 8% compounded quarterly Withdrew P 350,000 after 3 years and 2…

Q: MY NOTES ASK YOUR TEACHER The First National Bank is offering a 4 year certificate of deposit (CD)…

A: Future value is the future worth of a cash flow at a certain rate of interest and time period.…

Q: Question 1 a) A company is due to receive a payment of £500,000 from a customer in 6 months’ time.…

A: “Since you have posted a question with multiple sub-parts, we will solve first three subparts for…

Q: A client at Southern Trust just made a deposit of $1,000 into an account expected to earn an…

A: Present value of future amount Present value (PV) and future value (FV) are related to each other…

Q: The left bank is offering CDs at 5%. The right bank is offering a money market account at 4%. If I…

A: Fill in below with the information to set up the system of equations: State your answer in complete…

Q: A bank has an average duration of assets (DURa) of 3.6 and an average duration of liabilities (DURl)…

A: Duration gap analysis is a method to calculate changes in the market value of assets, liabilities…

Q: Consider the following Balance Sheet for Forward Thinking Commercial Bank(FTCB) (in millions)…

A: Net Interest Income (NII) Net Interest Income is the difference between the amount of total…

Q: Use Table 12-1 to solve. Suppose a certain manufacturer deposits $7,000 at the beginning of each 3…

A: The question is based on the concept of Annuity.

Q: (a) Explain the differences between annual percentage rate (APR) and effective annual rate (EAR).

A: Note: Since you have asked multiple questions, we will solve the first question for you. If you want…

Q: A bank features a savings account that has an annual percentage rate of r = 3.4% with interest…

A: The future value function or concept can be used to determine the future value of a present sum or…

Q: EFFECTIVE VERSUS NOMINAL INTEREST RATES Bank A pays 2% interest compoundedannually on deposits,…

A: The nominal rate of interest is an interest rate on deposits that helps in the determination of a…

Q: (a) Explain the differences between annual percentage rate (APR) and effective annual rate (EAR).

A: Introduction: Annual percentage rate can be defined as a periodic rate of interest on a loan is then…

Q: Engineer A puts PhP 500,000 and Engineer B puts PhP 0,000 into a savings account at different banks.…

A: Here we will use the concept of time value of money. As per the concept of time value of money the…

Q: You are shopping around to determine which bank account yields the highest return. You have three…

A: Future Value = Present Value x (1 + r)^n

Q: What is the amount C of quarterly deposits such that you will be able to withdraw the amounts shown…

A: Computation:

Q: Due to both interest earnings and the fact that money put to good use should generate additional…

A: The future value is the future worth of the amount that will be paid or received at future.

Q: A young man saved his money every quarter for 5 years into his bank account. He deposits P2,000 per…

A: i=(1+(r/m))^(m/q)-1 m= original compounding per period=12/2=6 q=new compounding per period=12/3=4

Q: You are shopping around to determine which bank account yields the highest return. You have three…

A: Amount = $2,200 Time Period = 2 Years

Q: Question 1 Mrs. Martin has $250 000 that she can deposit in any of three savings account for a three…

A: “Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: The First National Bank is offering a 3 year certificate of deposit (CD) at 4% interest compounded…

A: Here, First National Bank Second National Bank Investment $7,000 $7,000 Interest Rate (r)…

Q: Assume a firm makes a $2,500 deposit into its money market account. If this account is currently…

A: Interpretation: Deposit amount = $2,500 Interest rate = 0.7% Number of years = 1

Q: Suppose that you invest P dollars at the beginning of every week. However, your crazy banker decides…

A: Investment at the beginning of every week is $P Compound Interest Earned at the rate of r at the end…

Q: You are shopping around for different bank accounts and have found several different banking…

A: Effective annual rate (EAR) refers to a real interest rate which an investor is expect from his…

Q: If you deposit $700 in a bank account that earns 5 percent per year, how much total interest will…

A: Interest Amount = Principal * ( 1 + r )n - Principal

Q: Which of the following bank accounts has the lowest effective annual return? Group of answer choices…

A: Compound interest: The compound interest refers to the amount of interest gained or acquired for…

Q: There is no interperiod compounding for the transactions shown. Your manager asks you to determine…

A: The quarterly cash flow diagram for three years is as follows: As the interest rate is semiannual,…

Q: An individual makes five annual deposits of P 2,000 in a savings account that pays interest at a…

A: Annual deposit = 2,000 Interest Rate = 4% Period = 5 Years After 5 year the interest rate is…

Q: A bank features a savings account that has an annual percentage rate of r = 3.9% with interest…

A: given information annual percentage rate = 3.9% compounded interest quartely deposit = 7,500

Q: Question 3: A father wants to set up a bank account that will pay his daughter $(10000) at the…

A: Annuity means finite no. of payments which are same in size and made in equal intervals. A person…

Q: bank features a savings account that has an annual percentage rate of r=5.6% with interest…

A: The given problem deals with the time value of money.

Q: Question 3: B- An Entrepreneur assumes he will need $50,000 in 8 years to develop his business.…

A: Formula to calculate the present value is: P = A/(1+i)^n Where P is the present value, A is the…

Q: he First National Bank is offering a 4 year certificate of deposit (CD) at 4% interest compounded…

A: given, P = $7000 first bank : n = 4 , r= 4% ,m = 4 ( quarterly compounding) second bank : n =4,…

Q: Consider the following conditions: (a) In your new job you are paid each month, instead of weekly.…

A: Amount allocated or reserved for an investment is usually for noncommercial purposes. The benefits…

Q: You wish to invest ₱10,000 for a period of 5 years. Which of the following investments would be best…

A: Bank A - Simple Interest Future Value = (Principal + ( Principal * Interest rate * Number of…

Q: A bank features a savings account that has an annual percentage rate of r = 5.1% with interest…

A: Here we have an annual interest rate of 5.1% which is compounding quarterly. The formula give in the…

Q: Solve the following word problem by using Table 11-1. The First National Bank is offering a 5-year…

Q: Which one of the following bank accounts will you choose for a savings account? Bank A: An account…

A: When choosing a bank account for savings we choose the bank that offers highest EFF. EFF = (1 +…

Q: Consider the following Balance Sheet for Forward Thinking Commercial Bank(FTCB) (in millions)…

A: Net Interest Income Net Interest Income is the difference between the amount of total mortgagee /…

Question

Question 1

(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.

(iii) How much money will Phoebe have in Bank X’s account if the interest earned is withdrawn at the end of each month to pay for living expenses of the following month? Explain (without calculation) in NO MORE THAN THREE LINES your answer.

(iv) Explain the difference in the bank account balance in parts (ii) and (iii), with supporting calculations by showing the 5-year interest on principal, 5-year interest on interest and the total interest.

Definition Definition Percentage gain or loss from a specific investment over time. The rate of return is the difference between the closing and initial values of an investment divided by the initial value of the investment. The closing value includes any intermediate cash flows such as dividends or interest amounts.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: Interest rate

VIEW

Step 2: Answer and explanation

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

(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.
(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 (iii) How much money will Phoebe have in Bank X’s account if the interest earned is withdrawn at the end of each month to pay for living expenses of the following month? Explain (without calculation) in NO MORE THAN THREE LINES your answer. (iv) Explain the difference in the bank account balance in parts (ii) and (iii), with supporting calculations by showing the 5-year interest on principal, 5-year interest on interest and the total interest.
There is an investor stating they will pay out $84,000 at the end of 4 years. In order to invest into the opportunity, you'll need to make a deposit of $10,000 to thier indicated bank account. What is the average annaul return rate. Use excel functions to indicate your steps.
Formulate a system of equations for the situation below and solve.Michael Perez deposited a total of $2000 with two savings institutions. Bank A pays interest at the rate of 6%/year, whereas Bank B pays interest at the rate of 8%/year. If Michael earned a total of $128 in interest during a single year, how much did he deposit in each institution? Bank A $___ Bank B $___
Marcus is trying to decide which checking account to open. Bank A's account pays 1.6%, compounded annually. Bank Q's account pays 0.4% compounded quarterly. Which account will produce the highest return? Question 14 options: Bank A Bank Q They are the Same
A father wants to set up a bank account that will pay his daughter $18,000 at the end-of-quarter (EOQ) 4 and $30,000 at EOQ 8. He will fund this account by making quarterly payments of $X from the present (time zero) through EOQ 7. a. Draw a cash-flow diagram from the father's viewpoint. b. If the quarterly percentage rate is (form number%), what is the value $X that must be deposited into the account?
An investor has accumulated $4,450 and is looking for the best rate of return that can be earned over the next year. A bank savings account will pay 9%. A one-year bank certificate of deposit will pay 11%, but the minimum investment is $7,450. Required: a. Calculate the amount of return the investor would earn if the $4,450 were invested for one year at 9%. b. Calculate the net amount of return the investor would earn if $3,000 were borrowed at a cost of 19%, and then $7,450 were invested for one year at 11%. c. Calculate the net rate of return on the investment of $4,450 if the investor accepts the strategy of part b. Note: Round your answer to 2 decimal places. a. Amount of return b. Net amount of return c. Net rate of return %
A father wants to set up a bank account that will pay his daughter $12,000 at the end-of-quarter (EOQ) 4 and $24,000 at EOQ 8. He will fund this account by making quarterly payments of $A from the present (time zero) through EOQ 7. If the quarterly percentage rate is 2%, what is the value $A that must be deposited into the account? Please include equations used and cashflow diagram
Marcus is trying to decide which checking account to open. Bank A's account pays 1.6%, compounded annually. Bank Q's account pays 0.4% compounded quarterly. Which account will produce the highest return? Question 14 options: Bank A Bank Q They are the same Insufficient information provided
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.
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.)
A woman went to the Beneficial Loan Company and borrowed S10,000. She must pay S323.53 At the end of each month for the next 60 months. A. What is the Monthly Interest rate she is paying? What is the Nominal Interest rate? С. What is the Effective Interest rate? Make your cash flow diagram and solve. B.