# You plan to invest $2,000 in an individual retirement arrangement (IRA) today at a stated interest rate

## Question:

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.

Compounding

Compounding is the process in which an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will... Future Value

Future value (FV) is the value of a current asset at a future date based on an assumed rate of growth. The future value (FV) is important to investors and financial planners as they use it to estimate how much an investment made today will be worth...

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**Related Book For**

## Introduction to Corporate Finance What Companies Do

**ISBN:** 978-1111222284

3rd edition

**Authors:** John Graham, Scott Smart