Question

Your bank is offering you an account that will pay 23 % interest​ (an effective​ two-year rate) in total for a​ two-year deposit. Determine the equivalent discount rate for the following​ periods: a. Six months b. One year c. One month ​(Note: Be careful not to round any intermediate steps less than six decimal​ places.)

Answer 1

Determining equivalent discount rate for the following periods:

a. Six months:

= 23%/24 x 6 = 5.75%

b. One year:

= 23%/24 x 12 = 11.50%

c. One month:

= 23%/24 x 1 = 0.96%

Step-by-step explanation:

The equivalent discount rate is the rate that is applied as if it were on a period basis, like 24 months or 2 years, 12 months or 1 year, 6 months or 1/2 year, etc. It is a way of determining interest for a period that is more or less than a year. It helps in the calculation of interest so that the rate applied conforms with the period covered by the interest.