is half of 2 years [pic] So the equivalent 1 year rate is 9.54%. c. Since one month is [pic] of 2 years‚ using our rule [pic] So the equivalent 1 month rate is 0.763%. 5-2. Which do you prefer: a bank account that pays 5% per year (EAR) for three years or a. An account that pays 2[pic] every six months for three years? b. An account that pays 7[pic] every 18 months for three years? c. An account that pays [pic] per month for three years? If you deposit $1 into a bank account
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one-year deposit: 10% APR Compounded monthly‚ 10% APR compounded annually‚ and 9% APR compounded daily. Compute the EAR for each investment choice. (Assume that there are 365 days in the year.) Sol: 1+EAR= (1+r/k)k So‚ for 10% APR compounded monthly‚ the EAR is 1+EAR= (1+0.1/12)12 = 1.10471 => EAR= 10.47% For 10% compounded annually‚ the EAR is 1+EAR= (1+0.1)=1.1 * EAR= 10% (remains the same). For 9% compounded daily 1+EAR= (1+0.09/365)365 = 1.09416 * EAR= 9.4% 5-8. You can
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obtained through a commercial loan and by issuing corporate bonds. Here is some of the information regarding the APRs offered by two well-known commercial banks. Bank APR Number of Times Compounded National First Prime Rate + 6.75% Semiannually Regions Best 13.17 Monthly 1. Assuming that AirJet Parts‚ Inc. is considering loans from National First and Regions Best‚ what are the EARs for these two banks? Hint for National Bank: Go to the St. Louis Federal Reserve Board’s website (http://research
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of 2.53%‚ this bond makes 2 semi-annual coupon payments. Thus has 8 periods until maturity and we are required to determine what the duration‚ modified duration‚ and convexity of this bond is‚ based on the Annual Percentage Rate (APR) and the Effective Annual Rate (EAR). Also‚ we are asked to explain an intuitive interpretation of duration. Methodology First‚ I entered the coupon rate for all bonds 1 through 8 and calculated the discount rate/period(r). Then‚ I used the present value formula (yr-8
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MPRIME as of 08/2013 was 3.25% APR for National First = 3.25% + 6.75% = 10% APR for Regions Best 13.17% EAR for National First [(1 = ((10%)/2)) 2-1 = 10.25% EAR for Regions Best [(1 = ((13.17%)/12)) 12-1 = 13.9947% 1. Based on the information about I would choose National First because of the lower EAR rate of 10.25% and also because the EAR is compounded semiannually making the EAR even lower over Regions Best who had a higher EAR at 13.9947% and compounds the EAR monthly. Based on all of this
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obtained through a commercial loan and by issuing corporate bonds. Here is some of the information regarding the APRs offered by two well-known commercial banks. Bank APR Number of Times Compounded National First Prime Rate + 6.75% Semiannually Regions Best 13.17 Monthly 1. Assuming that AirJet Parts‚ Inc. is considering loans from National First and Regions Best‚ what are the EARs for these two banks? Hint for National Bank: Go to the St. Louis Federal Reserve Board’s website (http://research
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[pic] So the equivalent 1 year rate is 9.54%. c. Since one month is [pic] of 2 years‚ using our rule [pic] So the equivalent 1 month rate is 0.763%. 5-2. Which do you prefer: a bank account that pays 5% per year (EAR) for three years or a. An account that pays 2[pic] every six months for three years? b. An account that pays 7[pic] every 18 months for three years? c. An account that pays [pic] per month for three years? If you
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can be quoted in a variety of ways. For financial decisions‚ it is important that any rates being compared be first converted to effective rates. The relationship between a quoted rate‚ such as an annual percentage rate (APR)‚ and an effective annual rate (EAR) is given by: EAR [1 (Quoted rate/m)]m 1 6.5 where m is the number of times during the year the money is compounded or‚ equivalently‚ the number of payments during the year. 4. Many loans are annuities. The process of providing for a
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Chapter 5 Interest Rates Problem 3 Which do you prefer: a bank account that pays 5% per year (EAR) for three years or a. An account that pays 2 every six months for three years? b. An account that pays 7 every 18 months for three years? c. An account that pays per month for three years? If you deposit $1 into a bank account that pays 5% per year for 3 years you will have after 3 years. a. If the account pays per 6 months then you will have after 3 years‚ so you prefer every 6 months
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CORPORATE FINANCE – CONCEPT QUESTIONS Class Notes - Introduction to Corporate Finance 1. Finance point of view: Corporation: a money processing machine? * Product markets: everything what corporates make (lead with customers‚ suppliers‚ labor) * Capital markets: generic term for the entities which supply cash to this money processing machine‚ and the processing machine uses the money to do things and then periodic sends money back to the capital market there are inflows from the
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