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## Explanation & Answer

Hello! Here is that engineering assignment, look through it and let me know if you need anything! It was great working with you!

Topics:

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•

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Nominal and effective interest rates

Bond value as an example of present worth (PW)

Chapter 6: Comparison and selection amongst alternatives based on PW, AW, IRR, and

Incremental Analysis

Instructions:

•

For full credit, begin each calculation with an appropriate formula, show accurate

calculations and appropriate units, and clearly identify your answers. The submissions are

recommended to be computer generated. You can write mathematical equations in MS

Word and export them to pdf file. See

https://support.office.com/en-us/article/Write-insert-or-change-an-equation-1d01cabcceb1-458d-bc70-7f9737722702

•

•

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Please be sure your work is neat and legible, not scribbled or squeezed into the white

spaces and margins of the assignment sheet.

Identify your answers clearly.

Answer all sub questions (if any) of a problem for full credit for that problem.

1. Try Your Skills 4-MMM Compute the effective annual interest rate in each of the following

situations. (See section 4.14 of the textbook)

(a) 5.75% nominal interest, compounded quarterly

𝑟 𝑛

((1 + ) − 1) ∗ 100

𝑛

. 0575 4

) − 1) ∗ 100 = 𝟓. 𝟖𝟕𝟓%

((1 +

4

(b) 5.75% nominal interest, compounded daily

𝑟 𝑛

((1 + ) − 1) ∗ 100

𝑛

. 0575 365

) − 1) ∗ 100 = 𝟓. 𝟗𝟏𝟖%

((1 +

365

2. Exercise 4-100 Find the interest rates in the following situations. (See section 4.14 of the

textbook)

(a) APR = 8%, compounded monthly. Find the effective annual interest rate.

𝑟 𝑛

((1 + 𝑛) − 1) ∗ 100

. 08 12

) − 1) ∗ 100 = 𝟖. 𝟑%

((1 +

12

(b) Nominal rate is 10% compounded quarterly. Find the effective semi-annual rate.

𝑛

((1 +

𝑟 2

)

𝑛

− 1) ∗ 100

4

. 10 2

) − 1) ∗ 100 = 𝟓. 𝟏%

((1 +

4

(c) The effective annual interest rate is 11.02% and compounding is monthly. Find the

nominal interest rate.

1

Monthly = ((1 + 𝑟)𝑛 − 1) ∗ 100

1

Monthly = ((1 + .1102)12 − 1) ∗ 100 = .875%

Nominal = 12 ∗ .0875 = 𝟏𝟎. 𝟓%

(d) r = 6% and compounding is monthly. Find the effective quarterly interest rate.

𝑟 𝑛

Monthly = ((1 + 𝑛) − 1) ∗ 100

.06 12

Monthly = ((1 + 12 )

− 1) ∗ 100 = 6.168%

Quarterly = .06168/4 = 1.54%

3. Try Your Skills 5-J

What is the maximum price you will pay for a bond with a face

value of $1,000 and a coupon rate of 14%, paid annually, if you want a yield to maturity of

10%? Assume that the bond will mature in 10 years and the first payment will be received in

one year. (See section 5.3 of t...