## Explain briefly the effective rate of discount

We therefore need a way of comparing interest rates. For example, is an annual interest rate of $$\text{8}\%$$ compounded quarterly higher or lower than an interest  Nominal, Period and Effective Interest Rates Based on Discrete Compounding of Interest Click here to visit our frequently asked questions about HTML5 video. Note: The following links explains how to use the excel function (EXP) to So we need to discount that for one year with the 12% of continuous interest. PV = A20 + A40 + A60 = 3281.25. 56 / 105. Page 57. The Effective Rate of Discount I. To understand discounts, let's consider 2 examples: If a person borrows $100 For investors, the discount rate is an opportunity cost of capital to value a business: Investors looking at buying into a business have many different options, but if you invest one business, you can’t invest that same money in another. So the discount rate reflects the hurdle rate for an investment to be worth it to you vs. another company. Second, divide the$100 discount by the 10 annual payments remaining on the bond to get $10. Third, add the$10 to the $100 in interest the bond pays each year to get$110. Fourth, divide $110 by the average of$1,900 and $2,000, or$1,950, to get 0.0564. Finally, multiply 0.0564 by 100 to find the effective interest rate is 5.64 percent. The Fed can use four tools to achieve its monetary policy goals: the discount rate, reserve requirements, open market operations, and interest on reserves. All four affect the amount of funds in the banking system. • The discount rate is the interest rate Reserve Banks charge commercial banks for short-term loans. Federal Reserve lending at The fed funds rate is the interest rate banks charge each other to lend Federal Reserve funds overnight. It's also the main tool the nation's central bank uses to control U.S. economic growth.That makes it a benchmark for interest rates on credit cards, mortgages, bank loans, and more.