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SCMA 361 Theory of Interest 3

Effective discount rate, nominal interest rate, nominal discount rate


Problem 1.16 Jiratthapob invests 738 in a bank account. One year later, his bank account is 765

1. Find the effective annual interest rate earned by Jiratthapob in that year.

2. Find the effective annual discount rate earned in this problem.

Problem 1.17 If i = 7%, what are d and v?

Problem 1.18 If v = 0.95, what are d and i?

Problem 1.19 What is the present value of 5,000 to be received in 7 years at an annual effective rate of
discount of 7%?

Problem 1.20 At time t = 0. Kannapat deposits 3,500 into a fund crediting interest with an annual discount
factor of 0.96. Find the fund value at year 2.5 .

Problem 1.21 Given an investment of 1,000, find the accumulation after 5 years using:

1. annual simple discount of 8%

2. annual compound discount of 8%

3. annual compound interest of 8%

Problem 1.22 100 is invested in the account which pays 2% interest every quarter. What is accumulated
value of 100 at the end of the year? Find the annual effective interest rate.

Problem 1.23 If i(4) = 5%, find the equivalent effective annual rate of interest.

Problem 1.24 Suppose that a principal of 100 is invested at the beginning of the year, and the interest is
accumulated at nominal annual rate of 18%, compounded monthly. What is the accumulated amount at the
end of the year? What is the annual effective rate of interest?

Problem 1.25 Chalermwong takes a loan of 569. Interest in the loan is charged using compound interest.
One month after a loan is taken the balance in this loan is 581.

1. Find the monthly effective interest rate, which Pairote is charged in his loan.

2. Find the annual nominal interest rate compounded monthly, which Pairote is charged in his loan.
SCMA 361 Theory of Interest 4

Problem 1.26 Jinnipak takes a loan of 8,000 at a nominal annual rate of interest of 10% per year convertible
quarterly. How much does she owe after 30 months.

Problem 1.27 Find the annual effective discount rate equivalent to a nominal discount rate of 12% per annum
convertible monthly.

Problem 1.28 Find the accumulated value of 100 at the end of two years:

1. if the nominal annual rate of interest is 6%, convertible quarterly; and

2. if the nominal annual rate of discount is 6%, convertible once every four years.

Problem 1.29 1. Express d(4) as a function of i(3) .

2. Express i(6) as a function of d(2) .

3. If d(4) = 5%, find i.

4. If i = 3%, find d(2) .

Assignment 2
1. What is the present value of $5,000 to be received in 7 years at an annual effective rate of discount of
7%? (3008.504)

2. 1,000 is to be accumulated by January 1, 2018, at a compound discount of 9% per year.

(a) Find the present value on January 1, 2015. (753.571)


(b) Find the value of i equivalent to d. (9.89%)

3. An investor deposits 1,000 today. The annual compound rate of discount is 6%. What is the accumulated
value of the investment at the end of 10 years? (1856.61)

4. Suppose that a(t) = 1.12t . What is the effective rate of discount in the 7th year?(10.714)

5. (SOA exam) Bruce and Robbie each open up new bank accounts at time 0 . Bruce deposits 100 into
his bank account, and Robbie deposits 50 into his. Each account earns an annual effective discount
rate of d: The amount of interest earned in Bruces account during the 11th year is equal to X. The
amount of interest earned in Robbies account during the 17th year is also equal to X. Calculate X and
d. (38.879, 10.91%)

6. You invest 10,000 now, at an annual simple interest rate of 12.5%. What is the effective rate of interest
during the 7th year of your investment? (7.14%)
SCMA 361 Theory of Interest 5

7. On April 1, 2021, you will need 100,000. Assuming a 10% annual compound effective rate of interest,
what would you have to invest on October 1, 2014, in order for you to fulfill that need? (53,820.48)

8. At a nominal annual interest rate of i(4) convertible quarterly, an investment of 1,500 grows to 2,700 in
5.5 years. Find i(4) . (10.83%)

9. On September 1, 2014, you invest X into an account earning a nominal annual interest rate of 9%
convertible monthly. On April 1, 2017, your account has grown to 11,631. Find X. (9226.15)

10. On the same day, A invests 1,000 into an account earning a nominal annual rate of interest of i(2) , and B
invests 3,000 into an account that earns the same rate i(2) . Five years later, As account is worth 1,750,
and Bs account is worth X. Find X. (5,250)

11. An investment of 150,000 eight years from now has a present value, now, of 65,000. Find the nominal
annual rate convertible monthly that is consistent with this situation. (10.50%)

12. Consider the nominal annual rate of discount convertible quarterly at which you can triple your money in
10 years. If you invest 2,500 at that same d(4) rate for 21 months, to how much would your investment
grow? (3029.96)

13. A offers to pay you 10,000 five years from now. B offers to pay you 8,000 at time t. The effective annual
interest rate is 10%. Find the value of t such that you are indifferent between As and Bs offers. (Note:
indifference means that both offers have the same present value.) Express t in years, to three decimal
places. (2.660)

14. You have the following choice in buying a product:


Option A: You can pay 10% below the current retail price now.
Option B: You can pay 5% above the current retail price two years from now. At what annual effective
rate of interest are you indifferent between these two options? (8.01%)

15. Find the present value of 5000, to be paid at the end of 25 months, at a rate of discount of 8% convertible
quarterly: (a) assuming compound discount throughout; (b) assuming simple discount during the final
fractional period. (a) 4225.27, b) 4225.46)

16. Suppose the nominal rate of interest, convertible monthly, is 6%. Find the present value of a cash flow
that will pay you 6,000 three years from today. (5013.87)

17. A manufacturer sells a product to a retailer who has the option of paying 30% below retail price immedi-
ately, or 25% below the retail price in six months. Find the annual effective rate of interest at which the
retailer would be indifferent between the two options. (14.80%)