Question

first simple bank pays 9.1 percent simple interest on its investment accounts. first complex bank pays interest on its accounts compounded annually. what rate should first complex bank set if it wants to match first simple bank over an investment horizon of 11 years? (do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Explanation: (a)

Given:

PV = 75300 (indicates the amount of loan)

Rate = 7.7%/12 (indicates monthly rate of interest)

Nper = 36 (indicates the period)

FV = 0 (indicates the future value, if any)

PMT = ? (indicates the amount of monthly payment)

Monthly Payment =PMT(Rate,Nper,PV,FV)

= PMT(7.7%/12,36,75300,0)

= 2349.22

Monthly Payment = $2,349.22

(b)

Effective Annual Rate = (1+APR)^1 - 1

Effective Annual Rate = (1 + 0.077/12)^12 -1

Effective Annual Rate = 7.98%