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Topic: PV of Bonds - interest (

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700321
Major Contributor

Joined: 26 Aug 2009
Online Status: Offline
Posts: 308

Posted: 17 Nov 2009 at 14:22 \| IP Logged

can someone help solve this in two scenarios?

At the beginning of year 1, $10,000 is invested at 8% interest, compounded semi-annually. What amount of interest is earned for year 2?

compounded quarterly? what amount of interest is earned for year 2?

thanks

bryris
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Joined: 07 Dec 2008
Location: United States
Online Status: Offline
Posts: 624

Posted: 17 Nov 2009 at 15:15 \| IP Logged

Just to lay out the logic:

Year 1

10000 * .04 = 400
10400 * .04 = 416

Year 2

10,816 * .04 = 432.64
11,249 * .04 = 449.96

$883 in year give or take.

Or you could just multiply the principal by the interest rate for the period in question to the power of the number of periods in question.

For example: 10,000 * (1.04)^4 = 11,698.59 <---value at end of latest period. Then just do a similar calculation for year 1 and subtract the product from the 11,698.59 to yield the interest in year 2.

For the second scenario, same thing, just use .02 (8%/4) as your rate and take it to the 8th (number of quarterly periods) power.

This is more of a FAR question, though, eh?

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