Applies TVM techniques using multiple compounding periods per year. a. You are s

Question

Applies TVM techniques using multiple compounding periods per year.

a.

You are saving for retirement and have the opportunity to invest in a security that pays a 12% annual rate of return, compounded quarterly. If you invest $100,000 in the security now how much will you have in your retirement account at the end of 10 years?

b.

Would it be better for your retirement account if the returns on the security were simply compounded once a year? (5 points) Explain why or why not. (15 points) Is more frequent compounding good for borrowers or for lenders and why?

c.

Colin’s grandparents want to make a gift of $50,000 towards his college education fund in 12 years. How much money would they have to deposit today in an account that accrues interest monthly if the rate quoted by the bank is 6 percent?

Explanation / Answer

a)

Future value = P×(1+r)^n

P is payment

r is interest rate per period

n is number of periods

= $100,000×(1+(12%÷4))^(10×4)

= $326,203.78

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