Assignment 06

Introduction to Finance
Compounding, EAR & Amortization
1. You want to buy a car, and a local bank will lend you $20,000. The loan will be fully
amortized over 5 years, and the nominal interest rate will be 12% with interest paid
annually. What will be the annual loan payment?
2. Bank A pays 5% interest compounded annually on deposits, while Bank B pays 4.5%
compounded daily. Based on the EAR, which bank should you use?
3. Five banks offer nominal rates of 6% on deposits, but A pays interest annually; B pays
semiannually; C pays quarterly; D pays monthly; and E pays daily. What effective annual
rate does each bank pay?
4. Find the amount to which $500 will grow under each of these conditions:
a. 12% compounded annually for 5 years
b. 12% compounded semiannually for 5 years
c. 12% compounded quarterly for 5 years
d. 12% compounded monthly for 5 years
e. 12% compounded daily for 5 years
f. Why does the observed pattern of FVs occur?

Deadline: Wednesday, April 27, 2022