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Financial Maths: Simple/Compound Interest

  1. May 8, 2012 #1
    1. The problem statement, all variables and given/known data

    As a financial advisor, you have been requested to analyse the following alternative
    sources of finance for your client who currently has a funding need of $1,000,000 for
    5 years. The three borrowing options that have been presented to you are:
    Option 1: ABC Friendly Finance Company
    The nominal rate is 10.50% per annum compounding daily.
    Option 2: DEF Commercial Bank Ltd
    The nominal rate is 10.55% per annum compounding quarterly.
    Option 3: SHARKIES Cheap Loans Ltd
    The rate is 9.50% per annum (simple interest) with the rate of 4.75% per each half
    year. All repayments will be made in equal ‘six monthly instalments’ over the life of
    the loan.

    (a) Calculate the effective rate of interest per annum for each alternative. Which
    source of finance would you recommend? Why? Show all workings.

    2. Relevant equations

    Effective Interest Rate=[tex](1+(r/m))^m-1[/tex]

    3. The attempt at a solution

    I've worked it out for Options 1 and 2 find but I'm stuck on 3.. i'm not sure if the simple rate needs to be converted to a compounding rate and there's no examples similar to this. Any help would be much appreaciated!
  2. jcsd
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