For each of the following (a and b) combinations of interest rates, compounding frequencies and terms,...

For each of the following (a and b) combinations of interest rates, compounding frequencies and terms, find the value of i (the interest rate per period), and n (the number of periods) that would be used in the compound interest formula.

a. 8%, quarterly compounding, 10 years

Also find the growth factor for 1 quarter, and the growth factor for the full 10 years.

b. 9%, compounding monthly, 7 years

Also find the growth factor for 1 year and the annual percentage increase.

Expert Solution

Ans a.
Interest rate 8% pa Qtrly Compounding , tenure 10 years
Effective Interest Rate =(1+8%/4)^4-1=	8.24%
So i for compouding interest formula would be 8.24%
n for compound interest for mual will be =10

Growth factor for 1 Qtr =1/4 th year =(1+8.24%)^(1/4)=		1.0200
i =8.24% , n=1/4

Growth Factor for 10 years, i=8.24% , n=10
Growth Factor for 10 years =(1+8.24%)^10=	2.2074

Ans b.
Interest rate 9% Compounded monthly ,7 years
Effective Interest Rate =(1+9%/12)^12-1=	9.381%
So i for compouding interest formula would be 9.381%
n for compound interest for mual will be =7

Growth factor for 1 year, i=9.381% , n=1
Growth Factor =(1+9.381%)^1=1.09381
Annual % increase is 9.381%

jeff jeffy answered 1 year ago

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