Compute the future value - shorter compounding period, Financial Accounting

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Compute the future value of Rs.5000 at the end of 6 years, whether nominal interest rate is 12 percent and the interest is allocated (payable) quarterly at frequency = 4

Solution:

 FVn  = PV (1 + k/m )m*n

FV6 = 5000(1 + .12/4)6*4

= 50000 (1 + .03)24

= 5000 * 2.0328

= 10,164

After 6 years the future value of Rs.5000 on the origin of quarterly compounding would be as Rs.10 164 whereas in condition of semi-annual and yearly compounding the future value would be as

FV6 = 5000(1 + .12/2)6*2

= 50000 (1 + .06)12

= 5000 * 2.0122

= 10,061

FV6 = 5000(1 + .12)6

= 5000(1.9738)

=  9868

This dissimilarity in future value is because of the fact that interest on interest has been computed.


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