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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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