## Explain the meaning of compound interest compounded yearly, Financial Management

Assignment Help:

\$7000 are invested at 5% per annum compound interest compounded yearly.  What would be the amount after 20 years?

Solution

Here i = 0.05, P = 7000, and n = 20. Putting it in the formula we get:

FV = 7000 x (1+0.05)20

FV = 7000 x 2.6533 = \$18573.1

We have taken a shortcut here.  We looked at future value of 1\$ at the end of 20 years at 5% interest in Future Value Interest Factor T able (which implies find the value of Future Value Interest Factor n, i) and found figure to be 2.6533 and then substituted the figure here to get answer.

Another way of doing it would be to use a scientific calculator and calculate value that comes out to be the same.

A 3rdway of doing this would be even simpler. Use a spreadsheet program. Let's see how we use Microsoft Excel to do the same.

Step 1: Go to Insert menu and choose function.  You get a screen which looks like this: Step 2: In financial function category choose FV (it stands for Future Value) and press OK. Step 3:  You would get a screen that would look like this: Step 4: Insert values as given in the illustration. Here r = I = 0.05, Nper is the number of periods = 20, Pmt is the periodic annuity (how to use it we will see later) = 0 in this case as there is no annual payment except first one. Pv is present value = 7000\$ in this case and Type is a value representing timing of the payment = 0 in this case as investment is done at the end of period 0 or at the start of the period1. This also means that we get returns at the end of period 20 simultaneously when we make the last payment. Putting these values we get below screen.

Note that result of the figures which you input is shown in formula result section where it's 18,573.08 \$.Compare this with figure that you get from using the value from table, a difference of 0.02 \$. Negligible.

What if the money was payable at the start of period instead of at the end of the period? Here it doesn't matter as there is only one investment and that is also at the start of first period. It would matter when we look at future value of the annuity. Though what is an annuity anyway? #### Cost of capital, Dividends are expected to grow at a constant rate of 5 per...

Dividends are expected to grow at a constant rate of 5 percent per year in the future. Firms last dividend was \$1 and stock price 10 dollars the firms beta 1,2 the rate of return o

#### Zero-coupon bonds, All the bonds are not making periodic coupon payments. ...

All the bonds are not making periodic coupon payments. Zero-coupon bonds are those bonds where the bondholder realizes interest by buying it at a deep discount to its face

#### Show limitations of profit maximization, Q. Show Limitations of Profit maxi...

Q. Show Limitations of Profit maximization? The Profit maximization criterion is criticized on the following grounds: i) Quality of Benefits: Profit maximization approach ig

#### What, differentiate between pricing and allocative efficincy

differentiate between pricing and allocative efficincy

#### Show inter-corporate deposits, Q. Show Inter-Corporate Deposits? Inter-...

Q. Show Inter-Corporate Deposits? Inter-Corporate Deposits: Inter-corporate lending/borrowing or deposits (ICDs) is a popular short-term investment alternative for companies in

#### Nominal interest rate, You have to make a payment of \$1,561.39 in 10 years....

You have to make a payment of \$1,561.39 in 10 years. To get the money for this payment, you will make 5 equivalent deposits, starting today and for the following 4 quarters, in a b

#### Cash flows from mortgage- backed security, It is a well known fact th...

It is a well known fact that the value of a financial claim reflects the present value of the cash flows produced by the financial claim. While valuing an MBS an

#### Cash flow yield analysis, A cash-flow yield is the discount r...

A cash-flow yield is the discount rate that makes the price of a mortgage-backed or asset-backed security equal to the present value of its ca

#### Illustrate modern method of measurements, Q. Illustrate Modern Method of Me...

Q. Illustrate Modern Method of Measurements? Holding Period Yield: The holding period yield is one of the modern techniques on Measuring return. It serves two purposes: a) I

#### Historical weights, Can some one tell me the defination of Historical weigh...

Can some one tell me the defination of Historical weights and how we calculate the historical weight?? And given the diffrence between Historical weight Vs Marginal weights??  