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Activity - Nominal Interest Rate

This document presents five problems involving calculations of interest rates, yields, and bonds. Problem I involves calculating the annual percentage rate and yield for a loan paid back in semi-annual interest payments. Problem II does the same for a loan with quarterly interest payments. Problem III provides interest rate, yield, and total interest calculations for a one-year certificate of deposit paying monthly interest. Problems IV and V require calculating nominal interest rates for various debt instruments factoring in inflation rates, risk premiums, and maturity periods.

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152 views

Activity - Nominal Interest Rate

This document presents five problems involving calculations of interest rates, yields, and bonds. Problem I involves calculating the annual percentage rate and yield for a loan paid back in semi-annual interest payments. Problem II does the same for a loan with quarterly interest payments. Problem III provides interest rate, yield, and total interest calculations for a one-year certificate of deposit paying monthly interest. Problems IV and V require calculating nominal interest rates for various debt instruments factoring in inflation rates, risk premiums, and maturity periods.

Uploaded by

Sam
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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PROBLEM

SOLVING: Supply the answer for each requirement.

I. Semi-annual interest : Annual Percentage Rate and Annual Percentage Yield Computation:

Pacita Diasen Shipping Corporation (PDS) loaned P 5,000,000 from Banco De Boro. PDS pays interest
of P 200,000 every six months.

1. What is the Annual Percentage Rate of Interest or Coupon rate?


2. What is the Annual Percentage Yield of Interest?

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

Cashiano Construction Corporation (CCC) borrowed P 200,000 for 90 day period. The CCC will repay
the P 200,000 principal amount and P 6,000 interest.

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

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

On January 1, 2017, Mr. Jim Henry deposited P 1,000,000 in Metro Filipino Bank. The certificate of
deposit provides that Mr. Henry earns monthly interest rate of 0.75%.

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, 2017, 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, 2017, if the agreement
considers compounding?

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

Mr. Nomi Nal, an investor, is planning to invest in debt securities issued by corporation or
government. He extracted the following data from BSP:
§ real risk free rate is 3%.
§ inflation in is expected to average 0.02
§ Default risk premium is 3.5%
§ Liquidity premium 1%
§ Maturity risk premium 2.5%
1. What is the nominal risk free rate if the inflation is relatively low? (use simple format)
2. What is the nominal risk free rate if the inflation is highly significant? (use cross term format)
3. What is the nominal interest rate of a short term corporate note?
4. What is the nominal interest rate of a long term government bond?
5. What is the nominal interest rate of a short term corporate note using cross term?
6. If the inflation is material, what is the nominal interest rate of a long term corporate bond?

V. Nominal Interest Rate: Corporate bond and treasury bill with projected inflation rates;

In 2017, BBM Corporation is planning to issue bonds in order to raise fund to finance its operating
and investing activities. BBM estimated that the additional premiums on risks are 3%, 1.5% and 3%
on maturity, liquidity and default, respectively. Due to the changes in the world market, the inflation
in 2017 is expected to average 3 percent per year for the next three years after which the inflation is
expected to average for 2% a year. The real risk free rate, k*, is 2.5%.

1. If BBM will issue a 5 year bond, what will be the expected nominal interest rate?
2. If BBM will issue an 8 year bond, what will be the expected nominal interest rate?
3. If BBM will issue a 10 year bond, what will be the expected nominal interest rate?
4. What is the expected Treasury bill rate in 2017?
5. What is the expected Treasury bill rate in 2018?

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