You have some money on deposit in a bank account which pays a nominal (or quoted)rate of 8.0944 percent,but with interest compounded daily (using a 365 day year).Your friend owns a security which calls for the payment of $10,000 after 27 months.The security is just as safe as your bank deposit,and your friend offers to sell it to you for $8,000.If you buy the security,by how much will the effective annual rate of return on your investment change?
A) 1.87%
B) 1.53%
C) 2.00%
D) 0.96%
E) 0.44%

Question

Quizplus · Accepted Answer

Step 1 - Compute the effective rate for the bank account.
Effective interest rate = 11ea7fdb_fc25_27a4_a768_692d7af2065a_TB2902_00 - 1
Effective interest rate = 11ea7fdb_fc25_27a5_a768_23ccf6f33ad4_TB2902_00 - 1 = 8.43%
Step 2 - Compute the nominal rate for the security.
Nominal interest rate = 11ea7fdb_fc25_27a6_a768_c1d03b2dfe5c_TB2902_00 - 1
Nominal interest rate = 11ea7fdb_fc25_4eb7_a768_af48d43fd47b_TB2902_00 - 1 = 9.96%
Step 3 - Convert the nominal rate into an effective rate.
Effective interest rate = 11ea7fdb_fc25_4eb8_a768_91e9cdc61d3a_TB2902_00 - 1 = 10.47%
Step 4 - Compare the two rates.
10.47% - 8.43% ≈ 2%

You Have Some Money on Deposit in a Bank Account