Ask Question
BusinessBusiness
5 July, 04:39

A bank offers the following certificates of deposit: Nominal annual interest rate Term in years (convertible quarterly) 1 4% 3 5% 5 5.65% The bank does not permit early withdrawal. The certificates mature at the end of the term. During the next six years the bank will continue to offer these certificates of deposit with the same terms and interest rates. An investor initially deposits $10,000 in the bank and withdraws both principal and interest at the end of six years. Calculate the maximum annual effective rate of interest the investor can earn over the 6-year period.

+1
Answers (2)
  1. 5 July, 05:44
    0
    i = 5.48%

    Explanation:

    We can use the following method to solve the given problem in the question.

    Two consecutive 3 year CDs:

    =10000 * (1 + (0.05/4)) ^12 * (1+. (0.05/4)) ^12 = 13, 473.51

    One 5 year CD and a 1 year CD:

    =10000 * (1 + (0.0565/4)) ^20 * (1+. (0.04/4)) ^4 = 13,775.75

    13,775.75 is the greater.

    The annual effective rate is

    =10000 * (1+I) ^6 = 13,775.75

    i = 5.48%
  2. 5 July, 06:51
    0
    5.48%

    Explanation:

    Effective interest rate is the actual interest rate that a investor receives on investment or a borrower pays on loan including the compounding effect.

    Here we have two possibilities

    Two consecutive 3 year CDs:

    Future value = 10,000 x (1 + (5%/4)) ^12 x (1 + (5%/4)) ^12 = $13, 473.51

    One 5 year CD and a 1 year CD:

    Future value = 10,000 x (1 + (5.65%/4)) ^20 x (1 + (4%/4)) ^4 = $13,775.75

    As $13,775.75 is the greater the investor will prefer this combination.

    Now calculate the Effective interest rate

    $10,000 x (1 + i) ^6 = 13,775.75

    i = 5.48%
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “A bank offers the following certificates of deposit: Nominal annual interest rate Term in years (convertible quarterly) 1 4% 3 5% 5 5.65% ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers
You Might be Interested in
You have just purchased a car and, to fund the purchase, you borrowed $31,000. If your monthly payments are $493.25 for the next 6 years, what is the APR of the loan?
Answers (1)
Navajo Corporation traded a used truck (cost $20,000, accumulated depreciation $18,000) for a small computer with a fair value of $3,300. Navajo also paid $500 in the transaction. Prepare the journal entry to record the exchange.
Answers (1)
Although horses were once a very important factor of production, the development of automobiles and other machinery reduced the demand for their use. This is an example of: a higher prices of substitute factors shifting demand for horses to the left.
Answers (1)
All the following items are similar to each other except one. Which item is least like the others? Season Winter Autumn Summer Spring
Answers (1)
Luis and Amy are programmers employed by X Corp. They work in cubicles next to each other. Both have M. Sc. degrees in computer science (Luis also has a Ph. D. in philosophy).
Answers (1)
New Questions in Business
Coronado Corporation is preparing its December 31, 2020, balance sheet. The following items may be reported as either a current or long-term liability. 1. On December 15, 2020, Coronado declared a cash dividend of $4.
Answers (1)
Decision tree analysis is more commonly used in valuing securities than real assets. True or False: The preceding statement is correct.
Answers (1)
religious persecution is wrong bc why should religious ppl be killed bc they have a different believe. its makes no sense.
Answers (1)
Melvin receives stock as a gift from his uncle. No gift tax is paid. The adjusted basis of the stock is $19,000 and the fair market value is $25,000. Melvin trades the stock for bonds with a fair market value of $22,000 and $3,000 cash.
Answers (1)
Petra's basis was $50,000 in the PAM Partnership interest just before she received a proportionate nonliquidating distribution consisting of land held for investment (basis of $40,000, fair market value of $60,000) and inventory (basis of $40,000,
Answers (1)
Home » Business » A bank offers the following certificates of deposit: Nominal annual interest rate Term in years (convertible quarterly) 1 4% 3 5% 5 5.65% The bank does not permit early withdrawal. The certificates mature at the end of the term.
Sign Up Forgot Password?