Question

For EACH of the following cases in the following table:

a. Calculate the future value at the end of the specified deposit period.

b. Determine the effective annual rate, EAR.

c. Compare the nominal annual rate, r, to the effective annual rate, EAR. What relationship exists between compounding frequency and the nominal and effective annual rates?

Compounding frequency, Deposit period (times/year) (years) Nominal annual rate, Case 7% Amount of initial deposit $2,400 $48,000 $900 $20,000 11% 6% 17% Print Done

Answer 1

a	Case	Intial amount	Nominal interest	Compounding frequency	Rate per period	Deposit years	Deposit period	Future value
	A	$2,400	7%	2	3.50%	7	14	$3,885	(2400*(1+0.035)^14)
	B	$48,000	11%	4	2.75%	5	20	$82,581	(48000*(1+0.0275)^20)
	C	$900	6%	1	6.00%	12	12	$1,811	(900*(1+0.06)^12)
	D	$20,000	17%	4	4.25%	6	24	$54,307	(20000*(1+0.0425)^24)
b	Effective annual interest rate
	A	7.12%	(1+0.035)^2-1
	B	11.46%	(1+0.0275)^4-1
	C	6.00%	(1+0.06)^1-1
	D	18.11%	(1+0.0425)^4-1
c	There is direct relationship between compounding frequecy and nominal interest rate to effective interest rate. As number of frequency of compounding increases,
	Effective annual interest rate increases.