Suppose that a woman deposits $10,000 into an investment fund that guarantees to pay 0.5% interest every month. That is, interest is compounded monthly at a rate of 0.5% per month. a) What is the nominal annual interest rate? b) What is the effective annual interest rate? c) Assuming that no additional deposits or withdrawals are made, use the appropriate compound interest factors to determine how much the fund will be worth: i) After 1 year; ii) After 2 years.
Suppose that a woman deposits $10,000 into an investment fund that guarantees to pay 0.5% interest every
month. That is, interest is compounded monthly at a rate of 0.5% per month.
a) What is the nominal annual interest rate?
b) What is the effective annual interest rate?
c) Assuming that no additional deposits or withdrawals are made, use the appropriate
factors to determine how much the fund will be worth:
i) After 1 year;
ii) After 2 years.
d) Verify that your answers in parts (b) and (c) are correct by constructing a table or spreadsheet that
shows how the initial deposit will grow over 2 years. At a minimum, your table or spreadsheet should
include a row for each interest period over a 2-year planning horizon and show:
the value of in the investment fund at the start of each interest period
the amount of interest earned each interest period; and
the value of the fund at the end of each interest period.
Be sure to briefly explain how your table or spreadsheet verifies your results from parts (b) and (c).
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