Sample Essay
The effective annual interest rate is calculated by the following formula (Brigham & Ehrhardt, 2001).
Effective Annual Rate = (1 + inom/m) m -1
Effective Annual Rate = (1 + 0.06/12)12 -1
Effective Annual Rate = 1.0617 – 1
Effective Annual Rate = 0.0617
Effective Annual Rate = 6.17%
2. A.
The same formula will be applied to calculate the future value with a slight variation of compounding periods.
FV = PV (1+i/360)360
FV = 4000 (1 + 0.000083)180
FV = $4,060.45
The future value for the savings account is $4060.45
B.
Amount Invested = $4,000
Future Value = $4,060.45
Interest earned = $60.45
C.
The effective annual interest rate is also calculated using the same formula as the previous section.
Effective Annual Rate = (1 + inom/m) m -1
Effective Annual Rate = (1 + 0.03/360)360 -1
Effective Annual Rate = 1.0304 – 1
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