Question 1

Explain the difference between "compounding period" and "compounding frequency."

Accepted Answer

The "compound period" is the time interval between successive conversions of interest to principal. The "compounding frequency" is not a time interval. Rather, it indicates how frequently (that is, the number time per year) we convert interest to principal.

Question 2

Explain the difference between "nominal rate of interest" and "periodic rate of interest."

Accepted Answer

The "periodic rate of interest" is the percent interest earned in a single compounding period. The "nominal rate of interest" is the annual interest rate you obtain if you extend the periodic rate to a full year. This is done by multiplying the periodic rate of interest by the number of compounding periods in a year.

Question 3

Calculate the periodic rate of interest if the nominal interest rate is 6% compounded:
a. monthly.
b. quarterly.
c. semiannually.

Accepted Answer

a) 0.5% per month
b) 1.5% per quarter
c) 3.0% per half-year

Question 4

Determine the periodic interest rate for a nominal interest rate of 4.8% compounded:
a. semiannually. 
b. quarterly. 
c. monthly.

Accepted Answer

The answer of Determine the periodic interest rate for a...

Question 5

What is the periodic rate of interest corresponding to:
a. 5.4% compounded quarterly?
b. 5.4% compounded monthly?

Accepted Answer

The answer of What is the periodic rate of interest...

Question 6

Calculate the nominal interest rate if the periodic rate is:
a. 3.6%% per half year. 
b. 1.8% per quarter. 
c. 0.6% per month.

Accepted Answer

The answer of Calculate the nominal interest rate if the...

Question 7

Determine the nominal rate of interest if the periodic rate is:
a. 1.5% per month?. 
b. 1.5% per quarter? 
c. 1.5% per half year.

Accepted Answer

The answer of Determine the nominal rate of interest if...

Question 8

Determine the nominal interest rate if the periodic rate is:
a) 1.25% per quarter.
b)  % per month.

Accepted Answer

The answer of Determine the nominal interest rate if the...

Question 9

What is the nominal rate of interest if the periodic rate is:
a)  per month?
b) 5.8% per year?

Accepted Answer

The answer of What is the nominal rate of interest...

Question 10

Calculate the compounding frequency for a nominal rate of 6.6% if the periodic rate of interest is:
a. 1.65%. 
b. 3.3%. 
c. 0.55%.

Accepted Answer

The answer of Calculate the compounding frequency for a nominal...

Question 11

For a nominal rate of 5.9%, determine the compounding frequency if the periodic interest rate is:
a. 2.95%. 
b.  
c. 1.475%.

Accepted Answer

The answer of For a nominal rate of 5.9%, determine...

Question 12

What is the compounding frequency for a nominal rate of 4.7% if the periodic interest rate is:
a) 1.175%?
b) %?

Accepted Answer

The answer of What is the compounding frequency for a...

Question 13

For a given nominal interest rate (say 10%) on a loan, would the borrower prefer it to be compounded annually or compounded monthly? Which compounding frequency would the lender prefer? Give a brief explanation.

Accepted Answer

The answer of For a given nominal interest rate (say...

Question 14

From a simple inspection, it is possible for an investor to rank the four rates of return in each of parts (a) and (b)? If so, state the ranking. Give a brief explanation to justify your answer.
a) 9.0% compounded monthly, 9.1% compounded quarterly, 9.2% compounded semiannually, 9.3% compounded annually.
b) 9.0% compounded annually, 9.1% compounded semiannually, 9.2% compounded quarterly, 9.3% compounded monthly.

Accepted Answer

The answer of From a simple inspection, it is possible...

Question 15

Suppose it took x years for an investment to grow from $100 to $200 at a fixed compound rate of return. How many more years will it take to earn an additional:
a) $100? 
b) $200? 
c) $300? In each case, pick an answer from: (i) more than x years, (ii) less than x years, (iii) exactly x years.

Accepted Answer

The answer of Suppose it took x years for an...

Question 16

What is the maturity value of $5000 invested at 6.0% compounded semiannually for seven years?

Accepted Answer

The answer of What is the maturity value of $5000...

Question 17

What is the future value of $8500 after 5½ years if it earns 9.5% compounded quarterly?

Accepted Answer

The answer of What is the future value of $8500...

Question 18

To what amount did $12,100 grow after 3¼ years if it earned 7.5% compounded monthly?

Accepted Answer

The answer of To what amount did $12,100 grow after...

Question 19

What was a $4400 investment worth after 6¾ years if it earned 5.4% compounded monthly?

Accepted Answer

The answer of What was a $4400 investment worth after...

Question 20

Assume that a $10,000 investment can earn 8% compounded quarterly. What will be its future value: a. After 15 years? b. After 20 years? c. After 25 years? d. After 30 years?

Accepted Answer

The answer of Assume that a $10,000 investment can earn...

Quiz 8: Compound Interest: Future Value and Present Value

Explain the difference between "compounding period" and "compounding frequency."

Explain the difference between "nominal rate of interest" and "periodic rate of interest."

Calculate the periodic rate of interest if the nominal interest rate is 6% compounded: a. monthly. b. quarterly. c. semiannually.

Determine the periodic interest rate for a nominal interest rate of 4.8% compounded: a. semiannually. b. quarterly. c. monthly.

What is the periodic rate of interest corresponding to: a. 5.4% compounded quarterly? b. 5.4% compounded monthly?

Calculate the nominal interest rate if the periodic rate is: a. 3.6%% per half year. b. 1.8% per quarter. c. 0.6% per month.

Determine the nominal rate of interest if the periodic rate is: a. 1.5% per month?. b. 1.5% per quarter? c. 1.5% per half year.

Determine the nominal interest rate if the periodic rate is: a) 1.25% per quarter. b) % per month.

What is the nominal rate of interest if the periodic rate is: a) per month? b) 5.8% per year?

Calculate the compounding frequency for a nominal rate of 6.6% if the periodic rate of interest is: a. 1.65%. b. 3.3%. c. 0.55%.

For a nominal rate of 5.9%, determine the compounding frequency if the periodic interest rate is: a. 2.95%. b. c. 1.475%.

What is the compounding frequency for a nominal rate of 4.7% if the periodic interest rate is: a) 1.175%? b) %?