Reference the attached question you have answered. What was the reason for dividing the 8% annual interest accural by 4 since it was on an annual basis and not quarterly?
Reference the attached question you have answered. What was the reason for dividing the 8% annual interest accural by 4 since it was on an annual basis and not quarterly?
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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Reference the attached question you have answered. What was the reason for dividing the 8% annual interest accural by 4 since it was on an annual basis and not quarterly?
Transcribed Image Text:Step 1 Analysis
We need to use future value annuity formula to get value after 10 years.
(1+i)" –1
Future value = PMT|
Where PMT =Periodic payment
i= Periodic rate of interest
n= Number of payments
Step 2 Calculation of future value
Since payment is due quarterly we need to divide interest rate by 4 and multiply time by 4 to
get periodic interest rate and number of payments payments.
Quarterly payment(PMT) =$500
Periodic rate of interest(i) =8%/4 =2% =0.02
Number of payments =10*4 =40
= $500|
(1+0.02)40
0.02
2.2080396636–1
= $500
0.02
1.2080396636
= $500
0.02
= $500 * 60. 401983318
= $30, 201
Hence value after 10 years is $30,201
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