CK-12-Pre-Calculus Concepts

http://www.ck12.org Chapter 13. Finance

2. What is the effective rate of a credit card interest charge of 34.99% APR compounded monthly?


3. Which bank offers the best deal to someone wishing to deposit money?
   
   
   • Bank A, offering 10% annually compounded
   
   
   • Bank B, offering 11% compounded quarterly
   
   
   • Bank C, offering 12% compounding continuously
   
   
   
   

Answers:

1. The following table shows the APY calculations for the three banks.

TABLE13.9:

Bank A Bank B Bank C

FV=PV( 1 +i)t

FV= 100 ( 1 + 0. 045 )

APY= 4 .5%

FV=PV

(

1 +ki

)kt

FV= 100

(

1 +^0.^0444

) 4

APY≈ 4 .473%

FV=PV·ert

FV= 100 e^0.^043

APY= 4 .394%

Bank B offers the best interest rate.
2.( 1 +.^349912 )^12 = 1 .4118 or a 41.18% effective interest rate.

3. The APY for Bank A remains at 10%. The APY for Bank C will be higher than Bank A because not only does it
   compound more often, it also has a higher compound rate.

Practice

For problems 1-4, find the APY for each of the following bank accounts.

1. Bank A, offering 3.5% annually compounded.


2. Bank B, offering 3.4% compounded quarterly.


3. Bank C, offering 3.3% compounded monthly.


4. Bank D, offering 3.3% compounding continuously.


5. What is the effective rate of a credit card interest charge of 21.99% APR compounded monthly?


6. What is the effective rate of a credit card interest charge of 16.89% APR compounded monthly?


7. What is the effective rate of a credit card interest charge of 18.49% APR compounded monthly?


8. The APY for two banks are the same. What nominal interest rate would a monthly compounding bank need to
   offer to match another bank offering 3% compounding continuously?


9. The APY for two banks are the same. What nominal interest rate would a quarterly compounding bank need to
   offer to match another bank offering 1.5% compounding continuously?


10. The APY for two banks are the same. What nominal interest rate would a daily compounding bank need to offer
    to match another bank offering 2% compounding monthly?


11. Explain the difference between APR and APY.


12. Give an example of a situation where the APY is higher than the APR. Explain why the APY is higher.