Nominal Rates of Interest and Discount (Examples) Homework Help

EXAMPLE 2-A.2

The Premier Rank 1 offers to 10 percent interest on a deposit of one year. Assuming (i) annual, (ii) half-yearly and (iii) quarterly frequency of interest compute the effective rates of interests in the three alternatives.

Solution  Assuming a deposit of Rs 1.000. the computation of the effective rates of interest is shown below.

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We can determine the effective rate given the nominal rate and vice-versa. Denoting the nominal rate of interest compounded/convertible PTHLY (where P represents the frequency of payments during the year such as 12 for monthly payment. 4 for quarterly payment and two for half-yearly payment) as i” and the corresponding effective rate of interest as i, symbolically

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EXAMPLE 2-A.3

Assuming [a) i = 0.0125 and (b) i” = 0.1025,  find the values of  (1)  i” and (2) i12”.

Solution

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Similar to the relationship between the nominal and effective rates of interest, the mathematical relationship between effective and nominal rates of discount is given by Equations 2.A.4 and 2-A.5. The nominal rates or interest and discount rate employed in computing the present value or annuities payable P-thly.

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EXAMPLE 2-A.4

 Assuming d12 =  0.12 and (i)2 = 0.12 find the value of (a) d and (b) d”

Solution

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The relationship between various nominal and effective rates of interest and discount is given in Table A.5

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