One payment stream is being compared to another. The first option is for $500 semi-annual payments over 5 years at an interest rate of 6% compounded semi-annually. The second option is for $250 quarterly payments over 5 years, with interest compounded quarterly. Determine the nominal rate of interest to be offered on the second option for both options to have equal future values.

Question

Quizplus · Accepted Answer

To find the nominal rate for the second option, calculate the future value of the first option using the formula for future value of an annuity. Then, set this equal to the future value of the second option and solve for the interest rate. The correct nominal rate that equates both future values is 5.65%.

One Payment Stream Is Being Compared to Another