Question
MUST SHOW ALL WORK (3 pictures)
7. (a) Will the future value be larger or smaller if we compound an initial amount more often than annually-for example, ever
(b-1) What is the future value of $200 after three years under 12% semiannual compounding? (1 point) (b-2) What is the effect
(d-2) What is the effective annual rate for 12% interest with daily compounding? (1 point)
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Answer #1
Q7 a)
Yes the future value be larger if we compound an initial amount more than annually, because in this case the interest is also earning interest every time compounding happens.
b1)
Excel formula Result
=FV(12%/2,3*2,,-200,0) $283.70
b2)
APR = 12%
m = 2
EAR = (1+APR/m)^m
=(1+(12%/2))^2-1 = 12.36%
EAR = 12.36%
c1)
APR = 12%
m = 4
Excel formula Result
=FV(12%/4,3*4,,-200,0) 285.15
c2)
APR = 12%
m = 4
EAR = (1+APR/m)^m
=(1+(12%/4))^4-1 = 12.55%
EAR = 12.55%
d1)
APR = 12%
m = 365
Excel formula Result
=FV(12%/365,3*365,,-200,0) 286.65
d2)
APR = 12%
m = 365
EAR = (1+APR/m)^m
=(1+(12%/365))^365-1 = 12.75%
EAR = 12.75%
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