Question

In the future value of an annuity calculation, what variables must be adjusted if payments are made quarterly?

a) The N, or number of periods must be changed to 4 to reflect 4 payments per year, AND the interest rate must be multiplied by 4 to appropriately adjust the periods compounded.

b) The N, or number of periods must be changed to 4, to reflect 4 payments per year, AND the interest rate must be divided by 4 to appropriately adjust the compounding.

c) The N, or number of periods must be changed to 3 to reflect 3 payments per year, AND the interest rate must be multiplied by 3 to appropriately adjust the periods compounded.

d) The N, or number of periods must be changed to 3 to reflect 3 payments per year, AND the interest rate must be divided by 3 to appropriately adjust the periods compounded.

Answer 1

The answer is b) The N, or number of periods must be changed to 4, to reflect 4 payments per year, AND the interest rate must be divided by 4 to appropriately adjust the compounding.

See this excel formula for example:

=FV(8%,1,100,1000,) here 8% is assumed to be interest rate and 1 is the period used,

but in, =FV(8%/4,4,100,1000,) we have divided interest rate by 4 and changed 1 to 4 to reflect the number of quarters per period.