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Compounding Periods

Compounding Periods - $1,274.01 4 6 is the Annual...

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Compounding Periods Up until now, we have assumed interest is compounded annually. It could be compounded daily, weekly, monthly, quarterly, or semi-annually. The more frequent the compounding, the larger the FV (and smaller the PV). We can use our formulas, but they require 1
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Monthly Compounding – 1 Year One year ago, you invested $1,200 in an account that pays 6%, with interest compounded monthly . What do you have in your account today? Solve for FV 2 .06/12
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Monthly Compounding – 1 Year One year ago, you invested $1,200 in an account that pays 6%, with interest compounded monthly . What do you have in your account today? How did the monthly compounding affect our return? 3
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Monthly Compounding – 1 Year How did the monthly compounding affect our return? $1,200 (1.06) = $1,272.00 Annual compounding $1,200 (1.005)12 =
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Unformatted text preview: $1,274.01 4 6% is the Annual Percentage Rate (APR) which, by law, ignores compounding. Since we earned interest on interest, the Effective Annual Rate (EAR) is 6.1678%, not 6%. ..more on this in Chapter 5. Quarterly Compounding – 1 Year • One year ago, you invested $1,200 in an account that pays 6%, with interest compounded quarterly . What do you have in your account today? • Solve for FV – Enter 4 , then N (there are 4 compounding periods in a 5 It makes sense that it is more than annual compounding, but less than monthly compounding. Quarterly Compounding – 2 Years • Two years ago you invested $1,200 in an account that pays 6%, with interest compounded quarterly . What do you have in your account today? • Solve for FV – Enter 8 , then N [there are 8 compounding periods (4 6...
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