Compounding Period Problems

Compounding Period Problems

  1. Your bank offers a 4-year certificate of deposit at a 12% interest rate compounded quarterly. Determine how much additional interest you will earn over 4 years on a $10,000 CD that is compounded quarterly compared with one that compounded annually.

 

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  1. Your bank offers a 2-year certificate of deposit at a 10% interest rate compounded continuously. Determine how much additional interest you will earn over 2 years on a $10,000 CD that is compounded continuously compared with ones that are compounded annually or semiannually.

Solving for i and n

  1. As one of two heirs to an estate, you will collect $20,000 in 5 years. The other heir, Gertrude, offers you $15,000 for your share.  If you accept Gertrude’s offer, what effective rate of return would you earn?  If you can earn 8% on your investments, should you accept Gertrude’s offer?

 

  1. You bought a piece of land three years ago for $5,000. If you can sell it now for $7,407.50, what is you annual rate of return?  If you can normally earn a return of 20% on this type of investment, did you do well with this one?

 

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