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10 August, 17:33

Your bank is offering you an account that will pay 20 % interest in total for a two-year deposit. Determine the equivalent discount rate for the following: a. Six months b. One year c. One month

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  1. 10 August, 17:53
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    Answer: a. 0.042 b. 0.086 c. 0.00692

    Explanation:

    NOTE: Convert months to years. So 24 months = 2 years.

    a. Six months

    Months to year conversion gives: 6months/24months as 1/4 years

    = (1 + 18%) ^ 1/4 - 1 x 100%

    = 1.042 - 1

    = 0.042

    Equivalent Discount Rate = 0.042

    b. One year

    12months/24months as 1/2 years

    = (1 + 18%) ^1/2 - 1 x 100%

    = 0.086

    Equivalent Discount Rate = 0.086

    c. 1 month

    1month/24months as 1/24 years

    = (1 + 18%) ^1/24 - 1 x 100%

    = 0.00692
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