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(a) If interest is compounded monthly, how many times would the growth factor be applied in 3 years?

(a) If interest is compounded monthly, how many times would the growth factor be applied in 3 years?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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An equation of the form y=8000 (1.12)* provides an example of interest compounded annually. This means that the full 12% of interest is added to the account at the end of one year. This doesn't sound very fair to someone that invests their money for 11 months-they get no interest at all. This became a competitive disadvantage for financial institutions, and some began to divide the annual interest into periodic shares, so that (for example) you could get 1/12th of that 12% each month. When this happens, we say that interest is compounded monthly. Interest can also be compounded weekly (52 times per year), quarterly (4 times per year), daily (365 times per year), or really any other period you could think of. If interest is compounded monthly, calculate how many times the growth factor would be applied in each of the following time periods. (a) If interest is compounded monthly, how many times would the growth factor be applied in 3 years?
Transcribed Image Text:An equation of the form y=8000 (1.12)* provides an example of interest compounded annually. This means that the full 12% of interest is added to the account at the end of one year. This doesn't sound very fair to someone that invests their money for 11 months-they get no interest at all. This became a competitive disadvantage for financial institutions, and some began to divide the annual interest into periodic shares, so that (for example) you could get 1/12th of that 12% each month. When this happens, we say that interest is compounded monthly. Interest can also be compounded weekly (52 times per year), quarterly (4 times per year), daily (365 times per year), or really any other period you could think of. If interest is compounded monthly, calculate how many times the growth factor would be applied in each of the following time periods. (a) If interest is compounded monthly, how many times would the growth factor be applied in 3 years?
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