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Chapter 5Interest Rates Note: All problems in this chapter are available in MyFinanceLab. An asterisk (*) indicates problems with a higher level of difficulty. 1. a. Because six months is of two years, using our rule So the equivalent six-month rate is 4.66%. b. Because one year is half of two years So the equivalent one-year rate is 9.54%. c. Because one month is of two years, using our rule So the equivalent one-month rate is 0.763%. 2. a. 0.06/12 = 0.005 or 0.5% b. (1.005)12 – 1 = 0.0617 or 6.17% 3. Plan: The only way to compare these two rates is to convert them into their effective annual rates (EARs). To compute the EAR, you must first convert to the true rate at the appropriate compounding interval and then compound that rate over one year. The first rate is given as 15% compounded monthly, so you have to first compute the true monthly rate. The second rate is already given as a six-month rate (8% every six months), so you just have to compound it to get the EAR: Execute: Evaluate: You should use your credit card because the effective annual rate is lower. 4. Plan: Because the interest rates are quoted over different intervals, the only way to compare them is to compute the interest over a common interval. Here, the natural common interval to choose is three years. Execute: If you deposit $1 into a bank account that pays 5% per year for three years, you will have after three years. a. If the account pays per six months, then you will have after three years, so you prefer every six months. b. If the account pays per 18 months, then you will have after three years, so you prefer 5% per year. c. If the account pays 1/2% per month then you will have after three years, so you prefer 1/2% every month. Evaluate: The comparisons are very difficult to make unless you put them on an equal footing (common interval). Once you do so, the better choice becomes clear. *5. Plan: Draw a timeline to fully understand the timing of