12 General U4 T1 Loans, Investments, Annuities

Prior knowledge check. If you have money invested, do you want interest rate to be larger or smaller?

• Larger

• Smaller

Prior knowledge check. If you have are looking for a loan, do you want interest rate to be larger or smaller?

• Larger

• Smaller

A financial institution offers two investment options:

Option 1: 7% p.a. compounding quarterly

Option 2: 6.8% p.a. compounding monthly

What is the effective interest rate of option 1? (2 d.p.)

(a)  

A financial institution offers two investment options:

Option 1: 7% p.a. compounding quarterly

Option 2: 6.8% p.a. compounding monthly

What is the effective interest rate of option 2? (2 d.p.)

(a)  

A financial institution offers two investment options:

Option 1: 7% p.a. compounding quarterly

Option 2: 6.8% p.a. compounding monthtly.

Use the effective interest rate formula to determine the option that will provide the better return.

• Option 1: 7.19%

• Option 2: 7.02%

(P2) You have a savings account with an interest rate of 2.4% per annum paid quarterly. Your bank makes you a new offer. You are entitled to either an increase in the interest rate of 0.5% per annum, or to your current interest paid monthly. Which formula is the most efficient to compare the two options?

• compound interest

• Annuitites

• Effective Interest rate

• Geometric sequence

(P2) You have a savings account with an interest rate of 2.4% per annum paid quarterly. Your bank makes you a new offer. You are entitled to either an increase in the interest rate of 0.5% per annum, or to your current interest paid monthly. What is the effective interest rate of option 1 (rounded 2 dp.) (increase interest rate)?

(a)  

(P2) You have a savings account with an interest rate of 2.4% per annum paid quarterly. Your bank makes you a new offer. You are entitled to either an increase in the interest rate of 0.5% per annum, or to your current interest paid monthly. What is the effective interest rate of option 2 (rounded 2 dp.) (monthly)?

(a)  

(P2) You have a savings account with an interest rate of 2.4% per annum paid quarterly. Your bank makes you a new offer. You are entitled to either an increase in the interest rate of 0.5% per annum, or to your current interest paid monthly. Determine which option is the most profitable.

• Effective Interest rate Option 1 = 2.93%

• Effective Interest rate Option 1 = 2.43%

A loan of $10 000 has interest charged on a reducing balance at 6% p.a. compounding quarterly with quarterly repayments of $700. The balance after 6 months is

• $8696.75

• $8891.75

• $8900.00

• $9794.00