When calculating compound interest, the compounding frequency affects only the periodic interest rate, i.

true or false 

"What amount is needed today to acquire $1000 in 2 years if interest is gained at 2% compounded quarterly?"

What are the variables for this situation?

		i = 0.005 n = 8 S = 1000 P = ?
		i = 0.02 n = 4 S = 1000 P = ?
		i = 0.02 n = 8 S = 1000 P = ?
		i = 0.005 n = 4 S = 1000 P = ?

"You have $500 to deposit into an account and let it accumulate over 5 years. How much will it grow to if interest is gained at 1% compounded annually?"

What is $500?

		Future Value
		Present Value

1. Consider the nominal interest rate of 5% compounded semi-annually and the equivalent effective interest rate of 5.0625%. Which of the following statements is true?

   		After a year, $1000 would grow to $1050.63.
   		After a year, $1000 would grow to $1050.
   		After a year, $1000 would grow to $1102.50.
   		After a year, $1000 would grow to $1025.

1. A nominal interest rate is 10% compounded semi-annually. The effective interest rate is 10.25%. 10% compounded semi-annually and 10.25% compounded annually are equivalent interest rates.

    True

    False

   
   

   
   

   Below are two different nominal interest rates.

   A: 8.5% compounded monthly

   B: 8.6% compounded semi-annually

   
   

   Below are the approximate effective interest rates for the above nominal rates.

   A_effective: 8.84%

   B_effective: 8.78%

   Which of the following statements is true?

   		Since 8.6% is greater than 8.5%, rate A will gain more interest in a year.
   		Since 8.84% is greater than 8.78%, rate B will gain more interest in a year.
   		Rate A will gain more interest in the year because it is compounded more frequently regardless of the nominal rate.
   		None of the above are true.