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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