Question

Your bank offers a savings account that pays a stated (nominal) interest rate of 10 percent per year, compounded semiannually.

  

Requirement 1:

If you deposit $15,000 today into this account and leave it invested for 5 years, how much will you have in the account at the end of Year 5? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

  

Account Balance

$

Requirement 2:

What is the effective annual interest rate earned on money invested in this account? (Round your answer to 2 decimal places (e.g., 32.16).)

  

Effective Annual Rate

%

Requirement 3:

What is the highest effective annual rate attainable with a 10 percent nominal rate?

Answer 1

We are given the following information:

PV	15000
r	10.00%
n	5
frequency	2 (Semi Annual Compounding)

Requirement 1: We need to solve the following equation to arrive at the required FV

So the FV is $24433.42 rounded to 2 decimal places

Requirement 2: To find the effective annual return we need to solve the following equation:

Basically EAR is the equivalent annual rate that gives the same FV had the compounding been annual instead of semi-annual

Requirement 3: Maximum return is received in continuous compounding in which the FV is calculated by solving the following equation:

Or EAR = 10.52%