Loose Leaf for Financial Accounting: Information for Decisions
9th Edition
ISBN: 9781260158762
Author: John J Wild
Publisher: McGraw-Hill Education
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Question
Chapter B, Problem 1QS
Summary Introduction
Concept Introduction:
Future value is the value of present money after a period of time. Future value of present money is calculated using the interest rate and period. The present value of a sum is multiplied with the future value factor to get the future value.
To identify: the interest rate column and number of period.
Expert Solution & Answer
Explanation of Solution
| Rate | Interest rate | Number of period | |
| 12% annual rate, compounded annually | 12% | 1 | The compounding is annual, hence the rate shall remain same and period shall be 1. |
| 6% annual rate, compounded semiannually | 3% | 2 | The compounding is semiannual, hence the rate shall be half and period shall be double. |
| 8% annual rate, compounded quarterly | 2% | 4 | The compounding is quarterly, hence the rate shall be one fourth and period shall be four times. |
| 12% annual rate, compounded monthly | 1% | 12 | The compounding is monthly, hence the rate shall be divided by 12 and period shall be multiplied by 12. |
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Students have asked these similar questions
For each of the following cases, indicate (a) to what interest rate columns and (b) to what number of periods you would refer in looking up the future value factor. (Round percentages to 2 decimal places, e.g. 5,275.)(1) In Table 1 (future value of 1):
Annual Rate
Number ofYears Invested
Compounded
Case A
4%
3
Annually
Case B
9%
5
Semiannually
(a)
(b)
Case A
%
periods
Case B
%
periods
(2) In Table 2 (future value of an annuity of 1):
Annual Rate
Number ofYears Invested
Compounded
Case A
6%
5
Annually
Case B
12%
6
Semiannually
(a)
(b)
Case A
%
periods
Case B
%
periods
Which of the following is the correct mathematical expression of effective annual rate (EAR)? (m denotes the number of times the interest is compounded during the year.)
Multiple choice question.
EAR = [1 − (Quoted rate/m)]m + 1
EAR = [1 + (Quoted rate/m)]m − 1
EAR = [1 + (Quoted rate/m)]m + 1
EAR = [1 − (Quoted rate/m)]m − 1
For each of the following cases, indicate (a) to what rate columns, and (b) to what number of periods you would refer in looking up the
interest factor.
1. In a future value of 1 table:
a.
b.
C.
a.
b.
Annual
Rate
C.
11%
12%
12%
Annual
Rate
10%
11%
12%
Number of Years
Invested
Number
of Years
Invested
25
14
6
11
7
2. In a present value of an annuity of 1 table: (Round "Rate of Interest" answers to 1 decimal place, e.g. 4.5% and other answers to O decimal
places, e.g 45.)
19
Number
of Rents
Involved
25
28
Compounded
24
Annually
Quarterly
Semiannually
Frequency of
Rents
Annually
Semiannually
(a) Rate of Interest
Quarterly
%
(a) Rate of Interest
%
%
%
%
de
(b) Number of Periods
%
(b) Number of Periods
Chapter B Solutions
Loose Leaf for Financial Accounting: Information for Decisions
Knowledge Booster
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