Exercises 9.

7
Exercise 9.7, Solution 1:

a. 8%
0.08
i1 = 1
m1
m2
i2=(1 +i1 ) −1

1
0.08 12
=(1 + ) −1
1
= 0.006434...
j2 = i2 × m2 = 0.006434... × 12 = 0.077208... = 7.72 %
NOM C/Y EFF C/Y NOM
8 1 8 12 ?
NOM (calculator) = 7.720836132
Therefore, an effective rate of 8% is equivalent to 7.72% compounded monthly.
b. 12%
0. 12
i1 = 1
m1
m2
i2=(1 +i1 ) −1

1
0.12 12
=(1 + ) −1
1
= 0.009488...
j2 = i2 × m2 = 0.009488... × 12 = 0.113865... = 11.39 %
NOM C/Y EFF C/Y NOM
12 1 12 12 ?
NOM (calculator) = 11.38655152
Therefore, an effective rate of 12% is equivalent to 11.39% compounded monthly.
c. 85.34%

i1 =
m1
m2
i2=(1 +i1 ) −1
 = 0.05276336…
j2 = i2 × m2 = 0.05276336 × 12 = 0.633160… = 63.32 %
NOM C/Y EFF C/Y NOM
5.34 1 5.34 12 ?
NOM (calculator) = 63.316032
Therefore, an effective rate of 85.34% is equivalent to 63.32% compounded monthly.
Exercise 9.7, Solution 3:

0.0825
i1 = 1
m1
m2
i2=(1 +i1 ) −1

1
0.0825 2
=(1 + ) −1
1
= 0.040432...
j2 = i2 × m2 = 0.040432... × 2 = 0.080865... = 8.09 %
NOM C/Y EFF C/Y NOM
8.25 1 8.25000000 2 ?
NOM (calculator) = 8.086520467
Therefore, a nominal interest rate of 8.09% compounded semi-annually would place investors in exactly
the same financial position as 8.25% compounded annually.
Exercise 9.7, Solution 5:

0.0616
i1 = 4
m1
m2
i2=(1 +i1 ) −1
4
0. 0616 2
=(1 + ) −1
4
= 0.031037...
j2 = i2 × m2 = 0.031037... × 2 = 0.062074... = 6.21%
NOM C/Y EFF C/Y NOM
6.16 4 6.30376253 2 ?
 NOM (calculator) = 6.20743200
Therefore, a rate of 6.21% compounded semi-annually would place you in the same financial position as
6.16% compounded quarterly.
Exercise 9.7, Solution 7:

0.0325
i1 = 2
m1
m2
i2=(1 +i1 ) −1
2
0. 0325 4
=(1 + ) −1
2
= 0.008092...
j2 = i2 × m2 = 0.008092... × 4 = 0.032369... = 3.24%
NOM C/Y EFF C/Y NOM
3.25 2 3.27640625 4 ?
NOM (calculator) = 3.236903073
Therefore, your bank has to offer you the loan at 3.24% compounded quarterly.
Exercise 9.7, Solution 9:

a. 4.68% compounded daily

0.0468
i1 = 365
m1
m2
i2=(1 +i1 ) −1
365
0.0468 4
=(1 + ) −1
365
= 0.011768...
j2 = i2 × m2 = 0.011768... × 4 = 0.047072.... = 4.71%
NOM C/Y EFF C/Y NOM
4.68 365 4.791 4 ?
NOM (calculator) = 4.707182
b. 4.72% compounded monthly
0.0472
i1 = 12
 m1
m2
i2=(1 +i1 ) −1
12
0. 0472 4
=( 1 + ) −1
12
= 0.0011846…
j2 = i2 × m2 = 0.0011846... × 4 = 0.047386... = 4.74 %
NOM C/Y EFF C/Y NOM
4.72 12 4.823 4 ?
NOM (calculator) = 4.738590
c. 4.74% compounded semi-annually
0.0474
i1 = 2
m1
m2
i2=(1 +i1 ) −1
2
0.0474 4

=(1 + ) −1
2
= 0.011781...
j2 = i2 × m2 = 0.011781... × 4 = 0.047122... = 4.71 %
NOM C/Y EFF C/Y NOM
4.74 2 4.815 4 ?
NOM (calculator) = 4.712243
Therefore, 4.72% compounded monthly is the best rate for the investment, since it provides a higher return.
Exercise 9.7, Solution 11:

0.08
i1 = 2
m1
m2
i2=(1 +i1 ) −1

2
0.08
=(1 + )1 −1
2 = 0.0816
j2 = i2 × m2 = 0.0816 × 1 = 8.16%
NOM C/Y EFF
8 2 8.16000000
 EFF (calculator) = 8.16000000
Therefore, since the rates both rates are the equivalent, any of the two loans can be accepted.

Exercise 9.7, Solution 13:

Let’s convert the first and the second rate to an annually compounding rate:

16% compounded quarterly

0.16
i1 = 4

4
0.16 1
=( 1 + ) −1
4

= 0.169858...

j2 = i2 × m2 = 0.169858... × 1 = 16.99%

NOM C/Y EFF

16 4 ?

EFF (calculator) = 16.98585600

1.5% per month

m = 12, i= 1.5%

f = (1 + i) m - 1 = (1 + 0.015)12 – 1

= 0.195618… = 19.56%

1.5% per month is effectively 19.56% compounded annually.

NOM C/Y EFF

= 1.5 ¿ 12 = 18 12 ?

EFF (calculator) = 19.561817

 Therefore, the interest rate of 16% compounded quarterly would be most advantageous to him.

Exercise 9.7, Solution 15:

m = 12, i = 1.25%
f = (1+ i) m – 1 = (1 + 0.0125) 12 -1 = 0.160754… = 16.07545… = 16.08%
Therefore, the effective interest rate is 16.08%.
j= 16.08%, m= 1, j2 =? m2 =365
m1
m2
i2=(1 +i1 ) −1
1
365
i2 = (1 + 0.1608) -1 = 0.0004086…
j2 = i2 × m2 = 0.0004086… × 365 = 0.14913… = 14.91398… % = 14.91%
Therefore, the equivalent nominal interest rate compounded daily is 14.91%.
Exercise 9.7, Solution 17:
7% p.a.

I = 25,000 ¿ ( 0 . 07× )
6
12 = $875
FV = 25,000 + 875 = $25,875 t = 6 months,
t = 6/12 = 0.5

In this case n = m ¿ t = 12 ¿ 0.5 = 6

i= ( )
FV 1n
PV
−1

i= ( )
25 ,875 16
25 ,000
−1=0 .00575. ..

J2= m ¿ i = 12 ¿ 0.00575 = 0.069…= 6.9%.

Therefore, the monthly compounding rate that provides the same benefits as 7% p.a. will be 6.9%.
Exercise 9.7, Solution 19:

PV = 100,000

FV = PV + 2.5PV = 100,000 + 250,000 = 350,000

n = m × t = 2 × 10 = 20
 ( ) −1
1
FV n
i=
PV

( )
1
350,000 20
i= −1=0.064615273=6.46 %
100,000

j = m × i = 2 × 0.064615273 = 0.129283 = 12.93%

N I/Y P/Y C/Y PV PMT FV

20 ? 2 2 −100,000  0 350,000
I/Y (calculator) = 12.9283

Therefore, the nominal interest rate is 12.93%.

m
f =( 1+i ) −1

2
f =( 1+0.064615273 ) −1=0.1334616=13.35 %

NOM C/Y EFF

12.93 2 ?
EFF(calculator) = 13.34616

Therefore, the effective rate of return is 13.35%.

Exercise 9.7, Solution 21:

a. 6.75 % compounded semi-annually

j 0.0675
i= =
m 2 = 0.03375 semi-annually
f = (1 + i) – 1
m

= (1 + 0.03375) 2 – 1
= 0.068639 = 6.86%
NOM C/Y EFF
6.75 2 ?
EFF (calculator) = 6.86390
b. 6.75% compounded quarterly

j 0.0675
i= =
m 4 = 0.016875 quarterly
f = (1 + i) – 1
m

= (1 + 0.016875) 4 – 1
 = 0.069228... = 6.92%
NOM C/Y EFF
6.75 4 ?
EFF (calculator) = 6.922790
c. 6.75% compounded monthly

j 0.0675
i= =
m 12 = 0.005625 monthly
f = (1 + i) – 1
m

= (1 + 0.005625) 12 – 1
= 0.069627... = 6.96%
NOM C/Y EFF
6.75 12 ?
EFF (calculator) = 6.962794
d. 6.75 % compounded daily

j 0.0675
i= =
m 365 = 0.000185… daily
f = (1 + i) – 1
m

= (1 + 0.000185…) 365 – 1
= 0.069824… = 6.98 %
NOM C/Y EFF
6.75 365 ?
EFF (calculator) = 6.982358
Exercise 9.7, Solution 23:

a. 7.55% compounded annually

As it is compounded annually, this is the effective rate.
b. 7.30 % compounded daily

j 0.073
i= =
m 365 = 0.0002...
f = (1 + i) – 1
m

= (1 + 0.0002...) 365 – 1
= 0.075722...
= 7.57%
NOM C/Y EFF
7.30 365 ?
EFF (calculator) = 7.572268…
 Therefore the second rate (7.30% compounded daily) offers a higher rate of return.
Exercise 9.7, Solution 25:

2% compounded monthly

j 0.02
i= =
m 12 = 0.001666…. monthly
f = (1 + i) m – 1
= (1 + 0.001666….) 12 – 1
= 0.020184... = 2.02%
NOM C/Y EFF
2 12 ?
EFF (calculator) = 2.018435568
2.1% compounded semi-annually

j 0.021
i= =
m 2 = 0.0105 semi-annually
f = (1 + i) m – 1
= (1 + 0.0105) 2 – 1
= 0.02111025 = 2.11%
NOM C/Y EFF
2.1 2 ?
EFF (calculator) = 2.11102500
Therefore, Bank of Sarnia is offering them a higher return.
Exercise 9.7, Solution 27:

18.55% compounded daily

j 0.1855
i= =
m 365 = 0.000508 monthly
f = (1 + i) – 1
m

= (1 + 0.000598) 365 – 1
= 0.203763
NOM C/Y EFF
18.55 365 ?
EFF (calculator) = 20.376348
This is increased by 0.50%
20.376348… + 0.50 = 20.876348…%
The new effective rate is 20.88% compounded daily. We need to find the monthly compounding rate.
0.208763...= (1 + i) 12 – 1
 1.208763...= (1 + i) 12
(1.208763...) 1/12 = 1 + i
(1.208763...) 1/12 – 1 = i
i = 0.015925

j
i=
m
j = i × m = 0.015925...× 12 = 0.191104... = 19.11% compounded monthly.
NOM C/Y EFF
? 12 20.48
NOM (calculator) = 19.110365
Therefore, the new nominal interest rate compounded monthly is 19.11%.
Exercise 9.7, Solution 29:

i = 1.75% = 0.0175
f = (1 + i) m – 1 = (1 + 0.0175) 12 – 1 = 0.231439... = 23.14%
NOM C/Y EFF
21 12 ?
EFF (calculator) = 23.14393149
Therefore, the effective interest rate of 23.14% compounded annually should be disclosed to the borrower.

Exercise 9.7, Solution 31:

We have m = 12, i = 1.55%

f = (1 + i) m – 1 = (1 + 0.0155) 12 – 1

= 0.202705... = 20.27%

NOM C/Y EFF

18.6 12 ?

EFF (calculator) = 20.27050455

Therefore, the effective interest rate the bank should offer is 20.27%.

Exercise 9.7, Solution 33:

At effective interest rate, m = 1

n=m×t=1×6=6
 1

( )
1
13,000 6
i= ( )
FV n
PV
-1 =
8000
−1

= 0.084281...
Since the compounding frequency is 1, the periodic interest rate is effective interest rate.
N I/Y P/Y C/Y PV PMT FV

6 ? 1 1 −¿ 8000  0 13,000
I/Y (calculator) = 8.428194851
Therefore, an effective interest of 8.43% would provide the same benefit.

Exercise 9.7, Solution 35:

FV = PV + I = 20,000 + 880 = 20,880

At effective interest rate, m = 1
n=m×t=1×2=2
1
i= ( )
FV n
PV
−1 =
( ) 20,880 12
20,000
−1

= 0.021763...
Since the compounding frequency is 1, the periodic interest rate is effective interest rate.
N I/Y P/Y C/Y PV PMT FV

2 ? 1 1 −¿ 20,000  0 20,880
I/Y (calculator) = 2.176318196
Therefore, effective interest rate of the loan is 2.18%.
Exercise 9.7, Solution 37:

For the first year:

j = 5% = 0.05
m=2

j 0.05
i= =
m 2 = 0.025...semi-annually
PV = 45,000 FV=?
FV= 45,000 (1+0.025) 2 × 1
FV = 47,278.125
N I/Y P/Y C/Y PV PMT FV

2 5 2 2 −45,000  0 ?
FV (calculator) = 47,278.125
 For the last three years:
j = 4.5% = 0.045
m=4

j 0.045
i= =
m 4 = 0.01125...quarterly
PV = 47,278.125, FV=?
FV= 47,278.125 (1+0.01125) 4 × 3
FV = 54,070.78317
N I/Y P/Y C/Y PV PMT FV

12 4.5 4 4 −47,278.125
 0 ?
FV (calculator) = 54,070.78317
Therefore, the accumulated value is $54,070.78
54,070. 78317- 45,000 = 9070 . 78316
The compound interest is $9070.78
1
i=
FV n
PV ( )
-1 =
( 45,000 )
54,070.78317 14
−1 =0.046978=4 .70%

The effective interest rate is 4.70%.

Exercise 9.7, Solution 39:

First year:
j = 5% = 0.05
m=2

j 0.05
i= =
m 2 = 0.025...semi-annually
PV = 9000 FV=?
FV= 9000 (1+0.025) 2 × 1
FV = 9455.625…
N I/Y P/Y C/Y PV PMT FV

2 5 2 2 −9000  0 ?
FV (calculator) = 9455.625…
Second year:
j = 4.5% = 0.045
m =2

j 0.045
i= =
m 2 = 0.0225...semi-annually
 PV = 9455.625 FV=?
FV= 9455.625 (1+0.0225) 2 × 1
FV = 9885.915035…
N I/Y P/Y C/Y PV PMT FV

2 4.5 2 2 −9455.625  0 ?
FV (calculator) = 9885.915035…
Third year:
j = 4% = 0.04
m=2

j 0.04
i= =
m 2 = 0.02...semi-annually
PV = 9885.915035 FV=?
FV= 9885.915035 (1+0.02) 2 × 1
FV = 10,285.306…
N I/Y P/Y C/Y PV PMT FV

2 4 2 2 −9885.915035  0 ?
FV (calculator) = 10,285.306…
We can find the effective interest rate using the formula:
1

( )
1
10,285.306… 3
i=
PV( )
FV n
-1 =
9000
−1 =0.045502=4.55%

Therefore, the effective interest rate is 4.55%.

Exercise 9.7, Solution 41:

First we need to find the present value at the end of year one:
j = 5.2% = 0.052
m = 365

j
i=
m = 0.0001424…daily
PV =? FV=35,000
PV= 35,000 (1+0.0001424) -365 × 1
FV = 33,226. 6334
N I/Y P/Y C/Y PV PMT FV

365 5.2 365 365 ?  0 35,000

PV (calculator) = -33,226. 6334
Now we can find the amount invested at the beginning of year one:
j = 4.7% = 0.047
m = 365

j
i=
m = 0.0001287…daily
PV=? FV = 33,226. 6334
PV= 33,226. 6334 (1+0.0001287) -365 x 1
PV = 31,701.20811
N I/Y P/Y C/Y PV PMT FV
365 4.7 365 365 ?  0 33,237.64637
PV (calculator) =-31,701.20811
Therefore, the amount invested was $31,701.21
We can find the effective interest rate using the formula:

Therefore, the effective interest rate is 5.07%.