When comparing two investments with the same effective rate, one with a 4-year term and semi-annual compounding and one with a 2-year term and quarterly compounding,

Instructions
Complete the following problems using either a financial calculator or a spreadsheet program. Do not use interim rounding, state your answers as positive values, to two decimal places for dollar or period values and four places for percentages stated as decimals; do not label answers with symbols such as $ or %. For example, 10.5% should be input as .1050.

1. When comparing two investments with the same effective rate, one with a 4-year term and semi-annual compounding and one with a 2-year term and quarterly compounding, the nominal rate of the 4-year term instrument is ____ the nominal rate of the 2-year term instrument.

A. Lower than

B.the same as

C. higher than

2. Seamus McIntyre started saving for retirement today by investing $241 in an account earning 0.0888. He plans to continue with monthly contributions of the same amount for 32 years. The present value of his investment is:

Expert Solution

1. Option A is correct option
EAR of Investment 1 =EAR of Investment 2
(1+APR1/2)^8 =(1+APR2/4)^8
Hence APR 1/2=APR2/4
APR 1 =APR2/2

2. Monthly investment =241
Number of Periods =32*12 =384
Rate per month =0.0888/12
PV of this investment using financial calculator
I/Y =0.0888/12,N=384;PMT=-241;CPT PV =30647.85
PV of his investment =30647.85

jeff jeffy answered 2 years ago

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