Compounding frequency, time value, and effective annual rates

For each of the cases in the following table,

a.Calculate the future value at the end of the specified deposit period.

b.Determine the effective annual rate, EAR.

c.Compare the nominal annual rate, r, to the effective annual rate, EAR. What relationship exists between compounding frequency and the nominal and effective annual rates?

Case Initial Nom annual rate Comp.frq. Deposit Period

A $2,700 7% 2 5 B $50,000 12% 4 3 C $1,100 7% 1 11 D $20,000 17% 4 8