Your bank is offering you an account that will pay 20 % interest in total for a two-year deposit. Determine the equivalent discount rate for the following: a. Six months b. One year c. One month

Answer: a. 0.042 b. 0.086 c. 0.00692

Explanation:

NOTE: Convert months to years. So 24 months = 2 years.

a. Six months

Months to year conversion gives: 6months/24months as 1/4 years

= (1 + 18%) ^ 1/4 - 1 x 100%

= 1.042 - 1

= 0.042

Equivalent Discount Rate = 0.042

b. One year

12months/24months as 1/2 years

= (1 + 18%) ^1/2 - 1 x 100%

= 0.086

Equivalent Discount Rate = 0.086

c. 1 month

1month/24months as 1/24 years

= (1 + 18%) ^1/24 - 1 x 100%

= 0.00692