Nominal interest rate

Nominal Interest Rates vs. Real Interest Rates Assume we purchase a 1 year bond for face esteem that pays 6% toward the end of the year. We pay $100 toward the start of the year and get $106 toward the end of the year. In this manner the security pays a loan fee of 6%. This 6% is the ostensible loan cost, as we have not represented swelling. At whatever point individuals discuss the loan cost they're discussing the ostensible financing cost, unless they state generally. Presently assume the swelling

February 2016 1） Assuming that the nominal interest rate, the inflation rate, the real GDP growth and primary deficit remain constant for the next year, we can compute the projected next year end debt as a percentage of GDP by using the equation: dt+1=dt+i-πdt-grdt-st+1 In this case, dt is the public debt (as % of GDP) of 2011, which is 88%; i is the government interest rate 7% according to our assumption; π is the inflation rate, which was 2% if it is held constant constant in

Composition of interest rates In economics, interest is considered the price of money, therefore, it is also subject to distortions due to inflation. The nominal interest rate, which refers to the price before adjustment to inflation, is the one visible to the consumer (i.e., the interest tagged in a loan contract, credit card statement, etc). Nominal interest is composed by the real interest rate plus inflation, among other factors. A simple formula for the nominal interest is: i = r + π Where

b) & c) With a same $18,000 investment, in order to earn $35,000 after 6 years, how the nominal interest rates of the First National Bank differ if coumpounded annually, semiannually, quarterly and daily? Known factors ??? Solution: iN= n*[(FV/PV)¬1/(n*6) - 1] FV=$35,000 PV=$18,000 N=6 year Sub-Question n= Compounding frequency:

choose the discount rate to apply to these cash flows? abcdefg 2. Consider a one-year, $18,000 CD. a. What is its value at maturity if it pays 8.4 percent (annual) interest? b. Compute the future value if the CD pays 3.2 percent; if it pays 16.8 percent. Overall, what do these results indicate about the relation between level of interest and future value? c. The First National Bank of San Francisco offers CDs with an 8.4 percent nominal (stated) interest rate but compounded semiannually

to exhibit further five situations: • ‘Difference in Interest rates’ equals ‘Expected difference in Inflation rates’ • ‘Expected change in spot rate’ equals ‘expected difference in inflation rates’ • ‘Difference between forward and spot rates’ equals ‘Difference in Interest rates’ • ‘Difference between forward and spot rates’ equals ‘Expected difference in Inflation rates’ • ‘Expected change in spot rate’ equals ‘Difference in interest rates’ The validation procedure of the aforementioned five theories

deposited four years ago has grown to $7,000. What semiannual compounded rate of interest has the bank been paying you? PV = 5,500 N = 4 x 2 = 8 Pmt = - FV = 7,000 I = 3.06% 2. The Costanza Resort borrowed $125,000 from the Ross Bank to pay for a new air conditioning system. The loan is for a period of 5 years at an interest rate of 10% and requires 5 equal end-of-year payments that include both principal and interest on the outstanding balance. What will be the outstanding balance after

maturity with 10% interest is $11,000. Financial Calculator Inputs: $ -10,000=PV, 1=N, I=10, FV=? ($11,000) B. The future value of a 1-year, $10,000 CD after one year at an interest rate of 5.0% is $10,500. Financial Calculator Inputs: $-10,000=PV, 1=N, 5=I, FV=? ($10,500) The future value of a 1-year, $10,000 CD after one year at an interest rate of 15.0% is $11,500. Financial Calculator Inputs: $-10,000=PV, 1-N, 15=I, FV=? ($11,500) C. The effective annual rate of First National

Po: Principals i: interest rate n: number of time periods. Compound interest is interest that is paid not only on the principal but also on any interest earned but not withdrawn during earlier periods. This happens when interest is earned on the interest earned in prior periods. Returning to the example above, you put 10 million in an account with compounding interest rate of 8% / year. After 10 years, how much money do you have? (including principal and interest) After the first year

would create jobs and get the economy back to full employment). Given all the changes (the imposition of the tax by the local government and the investment tax credit offered by the Federal Government), what would they have to do to the real rate of interest to achieve their objective? Please show all work and I am looking for a specific number (i.e., r = ?). h) (10 points) Finally, explain how this most previous development (a change in r) would influence your two diagrams and why. Don’t show