Question

eBook Find the future values of the following ordinary annuities: FV of $800 paid each 6 months for 5 years at a nominal rate of 9% compounded semiannually. Do not round intermediate calculations. Round your answer to the nearest cent. FV of $400 paid each 3 months for 5 years at a nominal rate of 9% compounded quarterly. Do not round intermediate calculations. Round your answer to the nearest cent. These annuities receive the same amount of cash during the 5-year period and earn interest at the same nominal rate, yet the annuity in part b ends up larger than the one in part a. Why does this occur?

Answer 1

a.

Calculating Future Value,

FV = [PV = 0, PMT = 800, T = 10, I = 0.09/2]

FV = $9,830.57

b.

Calculating Future Value,

FV = [PV = 0, PMT = 400, T = 20, I = 0.09/4]

FV = $9,964.61

c.

This is due to the period of compounding.