Consider a deposit into a bank with a stated interest rate 6%, compounded quarterly, for 3 years. The periodic interest rate is % and the number of periods would be
Consider a deposit into a bank with a stated interest rate 6%, compounded quarterly, for 3 years. The periodic interest rate is % and the number of periods would be
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter4: Time Value Of Money
Section: Chapter Questions
Problem 12MC: (1) What is the value at the end of Year 3 of the following cash flow stream if the quoted interest...
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Transcribed Image Text:Although annual compounding-interest compounded once per year-is very common and an instructive way to introduce future value calculations,
other compounding periods are possible. For example, semiannual compounding involves interest compounded twice per year.
In such a scenario, you must consider the periodic interest rates and the number of compounding periods. For annual compounding, it is simple the
periodic interest rate is the same as the stated nominal interest rate and the number of compounding periods is simply equal to the number of years.
However, under semiannual compounding, the periodic interest rate is calculated as:
Periodic rate
Stated annual rate
Number of payments per year
For semiannual compounding, this means you would divide the stated annual rate by two.
The number of periods is calculated as:
Number of periods (Number of years) x (Periods per year)
For semiannual compounding, this means you would multiply the number of years by two to get the total number of periods.
Consider a deposit into a bank with a stated interest rate 6%, compounded quarterly, for 3 years.
The periodic interest rate is
% and the number of periods would be
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