Practice math of compounding frequency different from annual (once per year) Future Value from Investing $100...

  

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Practice math of compounding frequency different from annual (once per year) Future Value from Investing $100 at 8% Interest Compounded Semiannually over 24 Months (2 Years) TABLE 5.3 Period 6 months 12 months 18 months 24 months TABLE 5.4 Period Beginning principal $100,00 104.00 108.16 112.49 3 months 6 months 9 months 12 months 15 months 18 months 21 months 24 months Future Value from Investing $100 at 8% Interest Compounded Quarterly over 24 Months (2 Years) Future Value from Investing $100 at 8% Interest Compounded Quarterly over 24 Months (2 Years) Beginning principal Future Value from Investing $100 at 8% Interest Compounded Semiannually over 24 Months (2 Years) TABLE 5.5 End of year 1 2 Formula: $100.00 102.00 FV, = PV X (1+ 104.04 106.12 108.24 110.41 112.62 114.87 m Future value calculation 100.00x (1+0.04)= 104.00x (1+0.04) - 108.16x (1+0.04) - 112.49 x (1 + 0.04) = Future Value from Investing $100 at 8% Interest Compounded Quarterly over 24 Months (2 Years) Future Value at the End of Years 1 and 2 from Investing $100 at 8% Interest, Given Various Compounding Periods Annual $108.00 116.64 Future value at end of period $104.00 108.16 mXw Future value calculation 100.00 x (1 +0.02) - 102.00 x (1 + 0.02) 104.04 x (1 + 0.02)= 106.12 x (1 + 0.02)= 108.24 x (1 + 0.02) = 110.41 x (1 + 0.02) - 112.62 x (1 + 0.02) - 114.87 x (1 +0.02) - 112.49 116.99 Compounding period Semiannual $108.16 116.99 Future value at end of period $102.00 104.04 106.12 108.24 110.41 112.62 114.87 117.17 Quarterly $108.24 117.17 Question: Suppose you are offered 13% interest on an investment. For compounding frequencies of annual, semi-annual, quarterly, monthly and daily, calculate the future value after 3 years of investment. Which frequency gives you maximum return? Does it make sense? Assume you are investing 100,000 Taka. Practice math of compounding frequency different from annual (once per year) Future Value from Investing $100 at 8% Interest Compounded Semiannually over 24 Months (2 Years) TABLE 5.3 Period 6 months 12 months 18 months 24 months TABLE 5.4 Period Beginning principal $100,00 104.00 108.16 112.49 3 months 6 months 9 months 12 months 15 months 18 months 21 months 24 months Future Value from Investing $100 at 8% Interest Compounded Quarterly over 24 Months (2 Years) Future Value from Investing $100 at 8% Interest Compounded Quarterly over 24 Months (2 Years) Beginning principal Future Value from Investing $100 at 8% Interest Compounded Semiannually over 24 Months (2 Years) TABLE 5.5 End of year 1 2 Formula: $100.00 102.00 FV, = PV X (1+ 104.04 106.12 108.24 110.41 112.62 114.87 m Future value calculation 100.00x (1+0.04)= 104.00x (1+0.04) - 108.16x (1+0.04) - 112.49 x (1 + 0.04) = Future Value from Investing $100 at 8% Interest Compounded Quarterly over 24 Months (2 Years) Future Value at the End of Years 1 and 2 from Investing $100 at 8% Interest, Given Various Compounding Periods Annual $108.00 116.64 Future value at end of period $104.00 108.16 mXw Future value calculation 100.00 x (1 +0.02) - 102.00 x (1 + 0.02) 104.04 x (1 + 0.02)= 106.12 x (1 + 0.02)= 108.24 x (1 + 0.02) = 110.41 x (1 + 0.02) - 112.62 x (1 + 0.02) - 114.87 x (1 +0.02) - 112.49 116.99 Compounding period Semiannual $108.16 116.99 Future value at end of period $102.00 104.04 106.12 108.24 110.41 112.62 114.87 117.17 Quarterly $108.24 117.17 Question: Suppose you are offered 13% interest on an investment. For compounding frequencies of annual, semi-annual, quarterly, monthly and daily, calculate the future value after 3 years of investment. Which frequency gives you maximum return? Does it make sense? Assume you are investing 100,000 Taka.

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First lets test the formula from the example given FV Future Value PV Present Value 1 r m m n Where ... View the full answer