Brief Exercise 6-1 Chris Spear invested $18,500 today in a fund that earns 10% c

Question

Brief Exercise 6-1 Chris Spear invested $18,500 today in a fund that earns 10% compounded annually. (Use the tables below.) To what amount will the investment grow in 2 years? To what amount would the investment grow in 2 years if the fund earns 10% annual interest compounded semiannually? (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 458,581.) Investment at 10% annual interest $ Investment at 10% annual interest, compounded semiannually $ Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

Details Amt $ a Investment amount                  18,500.00 Interest rate   10% pa Years of investment                           2.00 Compounding factor for 2 years @10% is =(1.10)^2=                           1.21 Maturity Amt =18500*1.21=                22,385.00 So investment value after 2 years $            22,385.00 b When interest rate in compounded semi annually , the effective annual interest rate=(1+r/n)^n-1 here r=10% n=2 So effective annual rate=(1+0.10/2)^2-1                                                         = 10.25% pa Compounding factor @10.25% for 2 years= (1.1025)^2=                           1.22 Invetsment value after 2 years=18500*1.22=                22,486.87

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