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MCR3U Compounding Frequently: Warm Up: Determine The Future Value of $100 Invested at 8% Per Year For 5 Years

The document discusses compound interest and how interest rates can be compounded more frequently than annually, such as semi-annually, quarterly, or monthly. It provides an example of how $100 invested at an annual rate of 8% compounded semi-annually results in an effective interest rate of 4% computed every 6 months. It also asks what the investment balance would be after one year. Additionally, it asks the reader to determine which of three investment options paying interest compounded at different frequencies would result in the highest ending balance after 10 years, and by how much, and what single annual interest rate would need to be offered to attract their investment.

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44 views

MCR3U Compounding Frequently: Warm Up: Determine The Future Value of $100 Invested at 8% Per Year For 5 Years

The document discusses compound interest and how interest rates can be compounded more frequently than annually, such as semi-annually, quarterly, or monthly. It provides an example of how $100 invested at an annual rate of 8% compounded semi-annually results in an effective interest rate of 4% computed every 6 months. It also asks what the investment balance would be after one year. Additionally, it asks the reader to determine which of three investment options paying interest compounded at different frequencies would result in the highest ending balance after 10 years, and by how much, and what single annual interest rate would need to be offered to attract their investment.

Uploaded by

api-25935812
Copyright
© Attribution Non-Commercial (BY-NC)
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Download as PDF, TXT or read online on Scribd
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MCR3U Compounding Frequently

Warm ­ up :  Determine the future value of $100 invested at 8% per 
year for 5 years

1
• Interest can be calculated more frequently than annually ­ such as semi­
annually, quarterly, monthly, daily, etc.
• An interest rate of 8% per year compounded semi­annually results in 
interest being calculated every 6 months at a rate of 4%  ­ this can also be 
written as 8%/a c.s.a.

If we were to invest $100 at 8%/a c.s.a. for 1 year, what 
would we have at the end?

2
Practice Question:
An investment of $1 000 is deposited into an account for 10 
years paying interest at one of the following rates.   Which 
one is best? worst? and by how much?

Option A:  5% /a compounded semi­annually
Option B:  4.5% /a compounded monthly
Option C:  4.8% /a compounded quarterly

If a fourth investment opportunity was available to you and 
it paid interest on an annual basis, what rate would they 
have to offer to gain your investment business?

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