In this exercise, use the add-on method of calculating interest to find the total interest and the monthly payment.

Amount of Loan	Length of Loan	Interest Rate
$\$ 535$	$16$ months	$5.1 \%$

Investigate the difference between compounding annually and simple interest. Round to the nearest cent. Find the interest for a 1-year CD for $5,000 at an interest rate of 2.5% compounded annually.

Solve for the unknown interest rate in each of the following:

True or False? If true, prove it. If false, find the true answer. If you invest $500, an annual rate of interest of 3% yields more money in the first year than a 2.5% continuous rate of interest.

Which of the following one-year $\$ 1000$ bank loans offers the lowest effective annual rate?

a. A loan with an APR of $5.9 \%$, compounded monthly

b. A loan with an APR of $5.9 \%$, compounded annually, that also has a compensating balance requirement of $9.7 \%$ (on which no interest is paid)

c. A loan with an APR of $5.9 \%$, compounded annually, that has a $1.2 \%$ loan origination fee

Ron Kenoly Inc. issued $600,000 of 9%, 10-year bonds on June 30, 2020, for$562,500. This price provided a yield of 10% on the bonds. Interest is payable semiannually on December 31 and June 30. If Kenoly uses the effective-interest method, determine the amount of interest expense to record if financial statements are issued on October 31, 2020.

Suppose that you have $9000 to invest. (a) If you invest it with the First National Bank at the nominal rate of 5% compounded quarterly, find the accumulated amount at the end of one year. (b) The First National Bank also offers certificates on which it pays 5.5% compounded continuously. However, a minimum investment of$10,000 is required. Because you have only $9000, the bank is willing to give you a 1-year loan for the extra$1000 that you need. Interest for this loan is at an effective rate of 8%, and both principal and interest are payable at the end of the year. Determine whether or not this strategy of investment is preferable to the strategy in part (a).

Part I: The appropriate method of amortizing a premium or discount on issuance of bonds is the effective-interest method.

Instructions

a. What is the effective-interest method of amortization and how is it different from and similar to the straight-line method of amortization?

b. How is amortization computed using the effective-interest method, and why and how do amounts obtained using the effective-interest method differ from amounts computed under the straight-line method?

Part II: Gains or losses from the early extinguishment of debt that is refunded can theoretically be accounted for in three ways:

1. Amortized over remaining life of old debt.
2. Amortized over the life of the new debt issue.
3. Recognized in the period of extinguishment.

Instructions

a. Develop supporting arguments for each of the three theoretical methods of accounting for gains and losses from the early extinguishment of debt.

b. Which of the methods above is generally accepted and how should the appropriate amount of gain or loss be shown in a company's financial statements?

In this exercise, use the add-on method of calculating interest to find the total interest and the monthly payment.

On May 15, Criqui Outback Clothiers borrowed some money on a 4-month note to provide cash during the slow season of the year. The interest rate on the note was 8%. At the time the note was due, the amount of interest owed was $480.

Instructions

(b) Assume the amount borrowed was$18,500. What was the interest rate if the amount of interest owed was $555?

You borrow $1,000 from the bank and agree to repay the loan over the next year in 12 equal monthly payments of$90. However, the bank also charges you loan-initiation fee of $20, which is taken out of the initial proceeds of the loan. What is the effective annual interest rate on the loan taking account of the impact of the initiation fee?

Investigate the difference between compounding annually and simple interest. Round to the nearest cent. Find the interest for a 6-year CD for $5,000 at an interest rate of 2%, compounded annually.

If a principal of P dollars is borrowed for a period of t years at a per annum interest rate r, expressed as a decimal, the interest I charged is _______ = _______. Interest charged according to this formula is called ________ _________.

$$\begin{array}{c} \small \textbf{AMOUNT PER \$1.00 INVESTED,}\\ \small \textbf{COMPOUNDED QUARTERLY} \end{array}$$

$$\begin{array}{c c} \small \textbf{Annual Rate} \hspace{10pt}& \small\textbf{Interest Period}\hspace{30pt}\\ \end{array}$$

$$\begin{array}{ c c c} & \textbf{1 year} & \textbf{4 years}\\[5pt] 10.00\% \hspace{10pt}& 1.103813 & 1.484506\\ 10.25\% \hspace{10pt}& 1.106508 & 1.499055\\ 10.50\% \hspace{10pt}& 1.109207 & 1.513738 \end{array}$$

Joe Ponderoza invested $4500 in a certificate of deposit that earns interest at a rate of 10.00% and matures after 4 years. Interest is compounded quarterly. What is the effective annual yield?