All else equal, less frequent compounding results in which ofthe following?larger number of periods...

All else equal, less frequent compounding results in which of the following?

larger number of periods per year

lower present values

lower effective annual rates

higher future values

2. You have an investment account that is starting with $1200. You would like the account to grow to $7500, and you can earn 6% interest annually. Assume you make no additional contributions to the account. Assume an annually compounded interest rate. How many years will you need to wait? (round to two decimals)

		32.99 years
		8.07 years
		29.78 years
		5.47 years
		31.45 years

Solutions

Expert Solution

1.
Lower effective annual rate

All else equal, less frequent compounding results in lower effective annual rate. All other options are wrong.

2.
PV = $1200
FV = $7500
Rate = 6%
PMT = 0

Number of years can be calculated by using the following excel formula:
=NPER(rate,pmt,pv,fv)
=NPER(6%,0,-1200,7500)
= 31.45 years

Number of years you will need to wait = 31.45 years

jeff jeffy answered 2 years ago

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Subjects

		larger number of periods per year
		lower present values
		lower effective annual rates
		higher future values