Seminar 2.

Foundations of Finance MN1019

Academic year 2016-2017

1. Discuss the notion of interest rate as “the usage price of money per
period of time”.
2. You put £1, 500 on a savings account for 7 years. The bank offers you a
nominal annual interest rate of 8%, compounded annually. How much
money will you have at the end of the 7 years? Suppose now that the
interest rate is compounded quarterly. How much money will you have
in this case?
3. John has recently won a lottery price of £80, 000. He wants to invest
this amount of money on a saving account and keep it for 5 years. He
has two possibilities. Bank A offers an annual interest rate of 4% with
monthly compounding. Bank B offers an annual interest rate of 4.5%
with quarterly compounding. Which option should John choose?
4. Suppose that bank A in Exercise 3 calculates the interest rate of 4.5%
with continuous compounding. Which option should John choose in
this case?
5. Suppose that you deposited £150 in the bank at a nominal annual
interest rate of 6% compounded monthly. How much will you have at
the end of the year? What is the effective annual interest rate?
6. Discuss the notion of inflation and the connection between nominal
interest rate, real interest rate and inflation rate.
7. Suppose that the inflation rate is 7% and the nominal interest rate is
15%. Calculate the value of the real interest rate.
8. Mark wants to invest the amount of £150, 000 on a saving account and
keep it in the saving account for the next 20 years. The bank offers
an interest rate of 3.75% per year with quarterly compounding for the
next 10 years. Thereafter, the bank offers an interest rate of 3.5% per
year with annual compounding for the remaining 10 years. How much
money will Mark have at the end of the 20 years?