Question

For a sum of money invested at 15% compounded quarterly for 14 years, state:

a. The number of compounding periods. n=

b. The periodic interest rate (i). i=

c. The numerical value of the compounding factor (1 + i)n.

Answer 1

a)

There are 4 quarters in a year.

Number of compounding periods = Total number of years * total number of quarters in a year

Number of compounding periods = 14 * 4

Number of compounding periods = 56

b)

Periodic interest = Annual interest / number of quarters in a year

Periodic interest = 15% / 4

Periodic interest = 3.75%

c)

numerical value of the compounding factor = (1 + rate)^time

numerical value of the compounding factor = (1 + 0.0375)^56

numerical value of the compounding factor = 7.8584