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:

 FV_n  = 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.

Posted Date: 4/9/2013 2:28:46 AM | Location : United States

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