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QUESTION
Banks routinely borrow money among themselves overnight, in order to cover their transactions during the day.
Banks routinely borrow money among themselves overnight, in order to cover their transactions during the day. The interest rate paid on these one-day loans is called the overnight rate and therefore is a nominal rate of interest compounded daily, j365.
If the ABC Bank borrows $20 000 000 for one day at a rate of j365 = 4%,
- Calculate the interest payment on the one-day loan.
- Calculate the interest payment if the rate had been 4% compounded continuously.
- If ABC borrowed $25 000 000 and paid back $25 002 568 the next day, what effective rate of interest, j, was it charged?
