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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

NONANNUAL COMPOUNDING

  1. a. You plan to make five deposits of $1,000 each, one every 6 months, with the first payment being made in 6 months. You will then make no more deposits. If the bank pays 6% nominal interest compounded semiannually, how much will be in your account after 3 years?
  2. b. One year from today you must make a payment of $4,000. To prepare for this payment, you plan to make two equal quarterly deposits (at the end of Quarters 1 and 2) in a bank that pays 6% nominal interest compounded quarterly. How large must each of the two payments be?

a.

Summary Introduction

To calculate: Amount in account after 3 years.

Non Annual Compounding:

When the cash flow compounding occurs more than one time in a year than interest rate is divided by number of time compounding occurs in a year. Number of year when multiplied by number of compounding in a year we get compounding period.

Explanation

Future value of cash is calculated in table below

Period in 6 monthsCash flowFuture Value CalculationFuture Value
0
1$1000 =1000(1+3%)5 $1,159.27
2$1000 =1000(1+3%)4 $1,125

b.

Summary Introduction

To calculate: Two amounts required to make a payment of $4,000 on two equal quarterly deposits in a bank that pays 6% interest rate.

Non Annual Compounding:

When the cash flow compounding occurs more than one time in a year than interest rate is divided by number of time compounding occurs in a year. Number of year when multiplied by number of compounding in a year we get compounding period.

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