Question

The nominal annual interest rate is i(4) = 6.60%. Kamala is going to receive C = $20,000, 1 year from today. Match up the following list of items. 1. The effective interest rate per period-? PV0(C)-? PV4(C)-? FV12(C)-?

Answer 1

i)

Effective Interest Rate or EAR = [{1+(APR/n)}^n]-1

Where, APR = Annual Interest Rate or Nominal Rate, n = Number of times compounded in a year

Therefore,

For Quarterly,

EAR = [{1+(0.066/4)}^4]-1 = 0.06765= 6.765%

ii)

PV at Year 0 = CF at Year 1/(1+EAR) = 20000/(1+0.06765) = $18732.7

iii)

PV at Year 4 = CF at Year 1*[(1+EAR)^3] = 20000/[(1+0.06765)^3] = 20000*1.217 = $24339.89

iv)

PV at Year 12 = CF at Year 1*[(1+EAR)^11] = 20000/[(1+0.06765)^11] = 20000*2.054588= $41091.77