Running Head: ADVANCE FINANCE 1
Advance Finance
Insert Name
Insert Institution
ADVANCE FINANCE 2
Advance Finance
Question 1: Periodic Interest Rates
Calculating Periodic Rate and Effective Annual Interest Rate
Applied Formula by Fouque and Papanicolaou (2011):
Effective interest rate per period, (i) = ( 1 + ( r / m ) )m – 1
Effective interest rate for t periods, it = ( 1 + i )t – 1
or a single equation it = ( 1 + ( r / m ) )mt – 1.
The rate per compounding period P = R / m, in percent.
Where: r = R/100 and i = I/100 (p. 124)
Filled Table (Rounded to two decimal places)
Period Annual
percentag
e rate
(APR)
Compoundin
g per Period
(m)
Periodic rate/
Periodic Interest Rate
(P)
Effective Annual Rate
(i)
Semiannua
l
9% 2 4.50% 9.20%
Quarterly 10% 4 2.50% 10.38%
Monthly 8.5% 12 0.71% 8.84%
Daily 3.25% 365 0.01% 3.30%
Question 2: Periodic Interest Rate
Given:
This is a Saving Account, no adding or withdrawing from the account
Which is favorable?
Daily compound rate of 0.045%
Weekly compounded rate of 0.285%
Monthly compounded rate of 1.15%
Quarterly compounded rate of 4.325%
Semiannual compounded rate of 8.5%
(i) An interest rate compounded annually is favorable, since it yields the highest Effective
Annual Rate of Interest, and will accumulate more interest after the given period.
Period Annual
percentag
e rate
(APR)
Compoundin
g per Year
Periodic rate
Periodic Interest Rate
(P)
Effective Annual Rate
(i)
Annually 16% 1 16% 16%
Semiannuall
y
8.5% 2 4.25% 8.68%
Quarterly 4.25% 4 1.06% 4.32%
Monthly 1.15% 12 0.10% 1.16%
ADVANCE FINANCE 3
Weekly 0.285% 48 0.01% 0.29%
Daily 0.045% 365 0.00% 0.05%
(ii) Therefore Effective Annual Rate (in 2 decimal places) = 0.05%
Perio
d
Annual
percentag
e rate
(APR)
Compoundin
g per Year
Periodic rate
Periodic Interest Rate
(P)
Effective Annual Rate
(i)
Daily 0.045% 365 0.00012% 0.045%
Question 3: EAR
Period Annual
percentag
e rate
(APR)
Compoundin
g per Year
Periodic rate
Periodic Interest Rate
(P)
Effective Annual Rate
(i)
