4 can be rewritten for use when compounding takes

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Unformatted text preview: Equation 4.18 can be illustrated with a simple example. EXAMPLE The preceding examples calculated the amount that Fred Moreno would have at the end of 2 years if he deposited $100 at 8% interest compounded semiannually and compounded quarterly. For semiannual compounding, m would equal 2 in Equation 4.18; for quarterly compounding, m would equal 4. Substituting the appropriate values for semiannual and quarterly compounding into Equation 4.18, we find that 1. For semiannual compounding: FV2 $100 1 0.08 2 22 $100 (1 0.04)4 $116.99 156 PART 2 Important Financial Concepts 2. For quarterly compounding: FV2 $100 1 0.08 4 42 $100 (1 0.02)8 $117.16 These results agree with the values for FV2 in Tables 4.5 and 4.6. If the interest were compounded monthly, weekly, or daily, m would equal 12, 52, or 365, respectively. Using Computational Tools for Compounding More Frequently Than Annually We can use the future value interest factors for one dollar, given in Table A–1, when interest is compounded m times each year. Instead of indexi...
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