(Compound interest with non-annual periods) You received a bonus of $4,000. a. C

Question

(Compound interest with non-annual periods) You received a bonus of $4,000.

a. Calculate the value of $4,000, given that it will be held in the bank for 5 years and earn an annual interest rate of 3 percent.

b. recalculate part (a) using a compounding period that is (1) semiannual and (2) bimonthly.

c. recalculate parts (a) and (b) using and annual interest rate of 6 percent.

d. recalculate (a) using a time horizon of 10 years at an annual interest rate of 3 percent.

e. What conclusions can you draw when you compare the answers in parts c and d with answers in parts (a) and (b)?

Explanation / Answer

a) =

b) semi annual -> freq = 2

Ans bi month => freq = 6

c) annual

semi annual

bi monthly

d) time 10 years, 3 % ,

e) We can conclude that 3% for 10 years is same as 6% for 5 years computed semi annually

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