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QS B-1 Identifying interest rates in tables LO C1 Assume that you must make two-year-ahead future...

QS B-1 Identifying interest rates in tables LO C1

Assume that you must make two-year-ahead future value estimates using the future value of 1 table (FV of $1)

Which interest rate column do you use when working with the following rates? (Round percentage answers to 2 decimal places.)

Interest RateNo. of Periods1.10% annual rate, compounded quarterly82.12% annual rate, compounded annually23.6% annual rate, compounded semiannually44.12% annual rate, compounded monthly24
  

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Homework Answers

Answer #1

Number of periods

Interest rate column

10% annual rate, compounded quarterly

8

10%/4 quarters = 2.5%

12% annual rate, compounded annually

2

12%/1 period = 12%

6% annual rate, compounded semiannually

4

6%/2 = 3%

12% annual rate, compounded monthly

24

12%/12 = 1%

The formula to compute Future value includes n which means the number of periods in a year. So, the interest rate is also divided by number of periods in year and later on, the table shall be viewed of the resultant interest after division by number of periods in year.

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