Question

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.

Answer 1

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%