An important rule is that you should never show a nominal rate on a time line or use it in calculations unless what condition holds? (Hint: think of annual compounding, when iNom = EAR = iPer.) What would be wrong with your answer to questions l(1) and l(2) if you used the nominal rate (10%) rather than the periodic rate (iNom /2 = 10%/2 = 5%)?

MINI CASE 

Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank's evaluation process, you have been asked to take an examination which covers several financial analysis techniques. The first section of the test addresses discounted cash flow analysis. See how you would do by answering the following questions