a. If starting at t≥ 1, increasing t by one year multiplies the present value by b. Set the initial deposit to $10k, the annual interest rate to 5%, and years to compound to 10. Increasing the present value from $10k to $12k will increase the future value in 10 years by: $ LA a larger present value an additional 1+r 1+r r

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Effective Interest Rate

The term interest rate can be defined as the amount that is charged by the lender as a percentage on the principal amount. Interest rate which is charged annually is known as annual percentage rate.