Using annual, semiannual, and quarterly compounding periods, (1) calculate the future value if $5,000 is deposited initially at 11% annual interest for 9 years, and (2) determine the effective annual rate (EAR)
Using annual, semiannual, and quarterly compounding periods, (1) calculate the future value if $5,000 is deposited initially at 11% annual interest for 9 years, and (2) determine the effective annual rate (EAR)
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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Using annual, semiannual, and quarterly compounding periods, (1) calculate the future value if $5,000 is deposited initially at 11% annual interest for 9 years, and (2) determine the effective annual rate (EAR).
Expert Solution
Step 1: Introduction to time value of money
The concept of time value of money will be used and applied here. As per the concept of time value of money the worth of money changes with passage of time. This is because money has the power to earn interest. Hence a sum of money deposited today gets compounded leading to a higher future value.
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