Answer A (1) and A (2):
Deposit = $6,000
Annual interest rate = 11%
Period = 7 years
FV = $6,000 * (1 + 11%) 7
= $12,456.96
When annual rate is compounded annually, the EAR will remain same as annual rate = 11.00%
Answer B(1) and B(2):
Compounded semiannually:
Semiannual rate of interest = 11%/2 =5 .5%
Number of semiannual periods = 7 * 2 = 14
FV = $6,000 * (1 + 5.5%) 14
= $12,696.55
EAR = (1 + Nominal Interest rate / Number of compounding periods) Number of compounding periods - 1
= (1 + 11%/2) 2 - 1
=11.30%
Answer C(1) and C(2):
Compounded quarterly:
Quarterly rate of interest = 11%/4 =2.75%
Number of quarterly periods = 7 * 4 = 28
FV = $6,000 * (1 + 2.75%) 28
= $12,824.56
EAR = (1 + Nominal Interest rate / Number of compounding periods) Number of compounding periods - 1
= (1 + 11%/4) 4 - 1
=11.46%
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