Reading 5 Question 16 Thank

jim8z3

Hi,
Uuum, can anyone tell me how to solve for ‘r’ using the BAII Plus Prof?
Thank you!

draz

Thanks! Here it is:
A client is confused about two terms on some certificate of deposit rates quoted at his bank in the US. You explain that the stated annual rate is a rate that does not take into account compounding within a year. The rate his bank calls APY (annual percentage yield) is the effective annual rate taking into account compounding. The bank’s customer service rep mentioned monthly compounding, with $1000 becoming $1061.68 at the end of a year. To prepare to explain the terms to your client, calculate the stated annual interest rate that the bank must be quoting.
I can’t figure out how to solve for this using my calculator. Thanks!

Nishant1

The answer should work out to 6%. The textbook shows how to solve for it but not with my calculator ….

TheMBAGlover

Okay, yeah that makes sense.
so you need to get the rate with the monthly compounding which is what they give you, so (1061.68/1000) 1 = 6.168%
so thats the rate using monthly componding, they want the annual rate so:
(1.06168)^ 1/12 = .005 percent. Thats the monthly rate * 12 months = 6.0

firat

Got it! Cheers jut111!!!!

krause2

Gooner: “bank’s customer service rep mentioned monthly compounding”
To solve this using a calculator I entered..
12 N
1000 PV
1061.68 FV
CPT I/Y 0.50002
thats the monthly rate.. now multiply that by 12 to get the stated annual rate.