# Question: You plan to invest 2 000 in an individual retirement arrangement

You plan to invest $2,000 in an individual retirement arrangement (IRA) today at a stated interest rate of 8%, which is expected to apply to all future years.

a. How much will you have in the account at the end of 10 years if interest is compounded as follows?

(1) Annually

(2) Semiannually

(3) Daily (assume a 365-day year)

(4) Continuously

b. What is the effective annual rate (EAR) for each compounding period in part a?

c. How much greater will your IRA account balance be at the end of 10 years if interest is compounded continuously rather than annually?

d. How does the compounding frequency affect the future value and effective annual rate for a given deposit? Explain in terms of your findings in parts a–c.

a. How much will you have in the account at the end of 10 years if interest is compounded as follows?

(1) Annually

(2) Semiannually

(3) Daily (assume a 365-day year)

(4) Continuously

b. What is the effective annual rate (EAR) for each compounding period in part a?

c. How much greater will your IRA account balance be at the end of 10 years if interest is compounded continuously rather than annually?

d. How does the compounding frequency affect the future value and effective annual rate for a given deposit? Explain in terms of your findings in parts a–c.

## Answer to relevant Questions

Hector Garcia has shopped around for the best interest rates for his investment of $10,000 over the next year. He has found the following: Stated Rate Compounding 6.10%........................................ ...Determine the annual payment required to fund a future annual annuity of $12,000 per year. You will fund this future liability over the next five years, with the first payment to occur one year from today. The future $12,000 ...You plan to start saving for your son’s college education. He will begin college when he turns 18 years old and will need $4,000 then and in each of the following three years. You will make a deposit at the end of this ...Go to http://stockcharts.com/freecharts/yieldcurve.html and click on the animated yield-curve graph (be sure JAVA is enabled on your browser). Answer the following questions: a. Is the yield curve typically upward sloping, ...You are evaluating two similar bonds. Both mature in 4 years, both have a $1,000 par value, and both pay a coupon rate of 10 %. However, one bond pays that coupon in annual installments, whereas the other makes semiannual ...Post your question