Consider the following cases:
|
Amount of
|
|
Compounding
|
|
|
Initial
|
Stated Annual
|
Frequency, m
|
Deposit
|
|
Case
|
Deposit ($)
|
Rate, r (%)
|
(times/year)
|
Period (years)
|
|
|
|
|
|
|
A
|
2,500
|
6
|
2
|
5
|
|
|
|
|
|
|
B
|
50,000
|
12
|
6
|
3
|
|
|
|
|
|
|
C
|
1,000
|
5
|
1
|
10
|
|
|
|
|
|
|
D
|
20,000
|
16
|
4
|
6
|
a. Calculate the future value at the end of the specified deposit period.
b. Determine the effective annual rate (EAR).
Compare the stated annual rate (r) to the effective annual rate (EAR). What relationship exists between compounding frequency and the stated and effective annual rates?