Chapter 3, Problem 1P

To determine

Calculate the nominal interest rate.

Explanation of Solution

Option (a):

Time period is denoted by n and the interest rate is denoted by i. Nominal interest for semiannual can be calculated as follows.

$\begin{array}{c}\text{Nominal interst rate}={\text{i}}_{\text{Per quarter}}\times {\text{Quarter}}_{\text{In semiannual}}\\ =\text{0}\text{.02}\times \text{2}\\ =0.04\end{array}$

Nominal interest for semiannual is 4%.

Option (b):

Nominal interest for annual can be calculated as follows.

$\begin{array}{c}\text{Nominal interst rate}={\text{i}}_{\text{Per quarter}}\times {\text{Quarter}}_{\text{In year}}\\ =\text{0}\text{.02}\times \text{4}\\ =0.08\end{array}$

Nominal interest for annual is 8%.

Option (c):

Nominal interest for 2 years can be calculated as follows.

$\begin{array}{c}\text{Nominal interst rate}={\text{i}}_{\text{Per quarter}}\times {\text{Quarter}}_{\text{In 2 year}}\\ =\text{0}\text{.02}\times \text{8}\\ =0.16\end{array}$

Nominal interest for 2 year is 16%.