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Chap-5 Interest PDF

The document contains examples and exercises related to calculating annual percentage rates and yields for different interest compounding periods (semi-annual, quarterly, monthly). It includes questions about nominal interest rates for various financial instruments under different inflation scenarios. There are also true/false, multiple choice, and problem solving questions related to these topics.

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Ronalie Sustuedo
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© © All Rights Reserved
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141 views15 pages

Chap-5 Interest PDF

The document contains examples and exercises related to calculating annual percentage rates and yields for different interest compounding periods (semi-annual, quarterly, monthly). It includes questions about nominal interest rates for various financial instruments under different inflation scenarios. There are also true/false, multiple choice, and problem solving questions related to these topics.

Uploaded by

Ronalie Sustuedo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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CHAPTER EXERCISES

I. Semi-annual interest : Annual Percentage Rate and


Annual Percentage Yield Computation:

1. What is the Annual Percentage Rate of Interest or


Coupon rate?
2. What is the Annual Percentage Yield of Interest?

192
II. Quarterly interest : Annual Percentage Rate and
Annual Percentage Yield Computation:

1. What is the Annual Percentage Rate of Interest or


Coupon rate?
2. What is the Annual Percentage Yield?

193
III. Monthly interest : Annual Percentage Rate and Annual
Percentage Yield Computation:

1. What is the Annual Percentage Rate of Interest or


Coupon rate?
2. How much is the total interest earned by Mr. Henry as of
December 31, 2015, if the agreement does not consider
compounding?
3. What is the Annual Percentage Yield?
4. How much is the total interest earned by Mr. Henry as of
December 31, 2015, if the agreement considers
compounding?

1. Annual Percentage Rate = Monthly rate X 12 months


= 0.75% X 12
= 9%
2. Total Interest Earned:

per month

Thus, as of December 31, 2015, Mr. Jim earned P 90,000


(P7,500 per month X 12 months)

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3. Annual Percentage Yield:
}

4. Total Interest Earned = 9.38% x P 1,000,000 = 93,800

IV. Nominal Interest Rate: Short term and Long term


Corporate and Government Issued Debt Security; Risk
free rate computation using simple and cross term
format

1. What is the nominal risk free rate if the inflation is


relatively low? (use simple format)
Rfr = r* + IP
= 3% + 2% = 5%
2. What is the nominal risk free rate if the inflation is highly
significant? (use cross term format)
Rfr = r* + IP + (r* X IP)
= 3% + 2% + [ 3% X 2%]
= 5.06%

195
3. What is the nominal interest rate of a short term
corporate note?
NIR = r* + IP + DRP +LP
= 3% + 2% 3.5% + 1%
=9.5%

4. What is the nominal interest rate of a long term


government bond?
NIR= r* + IP + MRP
= 3% + 2% + 2.5%
=7.5%

5. What is the nominal interest rate of a short term


corporate note using cross term?
NIR = [r* + IP + (r* + IP)] + DRP +LP
= [3% + 2% + (3% X 2%)] + 3.5% + 1%
= 9.56%

6. If the inflation is material, what is the nominal interest


rate of a long term corporate bond?
NIR = [r* + IP + (r* + IP)] + DRP +LP + MRP
= [3% + 2% + (3% X 2%)] + 3.5% + 1% + 2.5%
= 12.06%

V. Nominal Interest Rate: Corporate bond and treasury


bill with projected inflation rates;

196
1. If BBM will issue a 5 year bond, what will be the expected
nominal interest rate? 8.1%
NIR = r* + average IP + MRP
= 2.5% + [ ] + 3%
= 8.1%

2. If BBM will issue an 8 year bond, what will be the


expected nominal interest rate?
NIR = r* + average IP + MRP
= 2.5% + [ ] + 3%
= 7.875%

3. If BBM will issue a 10 year bond, what will be the


expected nominal interest rate?
NIR = r* + average IP + MRP
= 2.5% + [ ] + 3%
= 7.8%

4. What is the expected Treasury bill rate in 2015?


NIR = r* + average IP + MRP
= 2.5% + [ ]
= 5.5%

5. What is the expected Treasury bill rate in 2018?


NIR = r* + average IP + MRP
= 2.5% + [ ]

197
= 5.25%

TRUE or FALSE: Write X if the statement is true while M if


false.

1. X
2. M
3. X
4. X
5. X
6. X
7. M
8. M
9. X
10. M
11. M
12. M
13. M
14. M
15. M

MULTIPLE CHOICE QUESTIONS: Choose the letter of the


best answer.
1. C
2. D
3. D
4. C

198
5. D
6. B
7. A
8. A
9. D
10. C
11. B
12. C
13. A
14. D
15. A

PROBLEM SOLVING:

1. What is the nominal risk-free rate for T-bills?


A. 4 percent
B. 5 percent
C. 13 percent
D. 14 percent

2. What is the nominal rate on long-term Treasury Bonds?


A. 12 percent
B. 14 percent
C. 17 percent
D. 18 percent

199
3. What is the average expected inflation rate over the 6-year
period?
A. 7 percent
B. 8 percent
C. 9 percent
D. 10 percent

4. What is the average expected inflation rate over the 8-year


period?
A. 7.0 percent
B. 8.0 percent
C. 9.5 percent
D. 10 percent

5. What is the real risk-free rate of return?


A. 0 percent
B. 3 percent
C. 4 percent
D. 5 percent

6. What is the Quoted Interest rate for short term Corporate


Note?
A. 10 percent
B. 12 percent
C. 13 percent
D. 14 percent

200
7. What is the Nominal Interest Rate for Long term Corporate
Bond?
A. 10 percent
B. 11 percent
C. 13 percent
D. 14 percent

8. What is the default risk premium on the corporate bond?


A. 1.22 percent
B. 2.0 percent
C. 2.42 percent
D. 2.70 percent

9. What is the nominal risk free rate in 2014?


A. 3 percent
B. 4 percent
C. 7 percent
D. 7.5 percent

10. What is the nominal risk free rate in 2017?


A. 7 percent
B. 7.25 percent
C. 7.4 percent
D. 7.5 percent

201
11. What is the nominal risk free rate in 2018?
A. 7 percent
B. 7.25 percent
C. 7.4 percent
D. 14 percent
12. If an 8 year corporate bond has a coupon rate of 12%, what
is the default risk premium?
A. 3.74 percent
B. 3.56 percent
C. 2.12 percent
D. 1.94 percent

13. If a 10 year treasury bond has a yield of 11%, what is the


default risk premium?
A. 3.25 percent
B. 2.25 percent
C. 1.25 percent
D. 0 percent

14. What is the nominal interest rate of a 5 year treasury note?


A. 9.8 percent
B. 8.0 percent
C. 7.4 percent
D. 6.6 percent

202
15. What is the nominal risk free rate if the inflation is relatively
low? (use simple format)
A. 2.03%
B. 5.00%
C. 5.06%
D. 6.00%

16. What is the nominal risk free rate if the inflation is highly
significant? (use cross term format)
A. 2.09 percent
B. 5.00 percent
C. 5.06 percent
D. 6.06 percent

17. What is the nominal interest rate of a short term corporate


note?
A. 10.5 percent
B. 9.5 percent
C. 9.0 percent
D. 7.5 percent

203
18. What is the nominal interest rate of a long term government
bond?
A. 9.0 percent
B. 8.0 percent
C. 7.5 percent
D. 6.5 percent

19. What is the nominal interest rate of a short term corporate


note using cross term?
A. 9.50 percent
B. 9.06 percent
C. 7.06 percent
D. 6.06 percent
20. If the inflation is material, what is the nominal interest rate of
a long term corporate bond?
A. 7.53 percent
B. 9.06 percent
C. 10.50 percent
D. 10.56 percent

21. What is the Annual Percentage Rate of Interest or Coupon


rate?
A. 6 percent
B. 7.2 percent
C. 8 percent
D. 8.09 percent

204
22. How much is the monthly interest payment of Ms. Danielle?
A. P 6,000
B. P 7,200
C. P 12,000
D. P 14,400

23. What is the Annual Percentage Yield?


A. 6 percent
B. 7.2 percent
C. 8 percent
D. 8.09 percent

24. What is the Annual Percentage Rate of Interest or Coupon


rate?
A. 2.5 percent
B. 2.515 percent
C. 5 percent
D. 5.06 percent

25. What is the Annual Percentage Yield of Interest?


A. 2.5 percent
B. 2.515 percent
C. 5 percent
D. 5.06 percent

205
“THAT IN ALL THINGS GOD MAY BE GLORIFIED”
“No matter what and how long it will take, I will succeed”

206

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