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ACCOUNTING AND FINANCIAL ENGINEERING - EXAMPLE 34.16 : An engineer would like to invest his money in a home, business and bond. The implicit interest payment frequency is monthly for home loans, quarterly for business loans; semi annually for bonds. A generalized mathematical formula to calculate I = interest rate equivalence is I = (1 + i / N) ^ N - 1 where i = annual interest rate, N = number of payment per year. (a) Calculate the value of N for : (i) home loans; (ii) business loans; (iii) bonds. (b) For i = 0.08, find the value of I for : (i) home loans; (ii) business loans; (iii) bonds.
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Answer Posted / kangchuentat
ACCOUNTING AND FINANCIAL ENGINEERING - ANSWER 34.16 : (a) (i) There are 12 months / year, then N = 12. (ii) There are 4 quarters / year, then N = 4. (iii) There are 2 semiannuals / year, then N = 2. (b) Use I = (1 + i / N) ^ N - 1 as a reference. (i) I = (1 + 0.08 / 12) ^ 12 - 1 = 0.083. (ii) I = (1 + 0.08 / 4) ^ 4 - 1 = 0.08243216. (iii) I = (1 + 0.08 / 2) ^ 2 - 1 = 0.0816. The answer is given by Kang Chuen Tat; PO Box 6263, Dandenong, Victoria VIC 3175, Australia; SMS +61405421706; chuentat@hotmail.com; http://kangchuentat.wordpress.com.
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