1. Explain how an interest rate is just a price.
2. Why is the EAR for 6% APR, with semi-annual compounding, higher than 6%?
3. Why is it so important to match the frequency of the interest rate to the frequency of the cash flows?
Your cousin is currently 12 years old. She will be going to college in six years. Your aunt and uncle would like to have $100,000 in a savings account to fund her education at that time. If the account promises to pay a fixed interest rate of 4% per year, how much money do they need to put into the account today to ensure that they will have $100,000 in six years?
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