Question

Find the accumulated value of an investment $10,000 for 3 years at an interest of 7% if the money is compounded semiannually; compounded quarterly; compounded monthly; compounded continuously

Answer 1

Answer:

Correct answer: 1) AV = 12,290 $, 2) AV = 12,310 $, 3) AV = 12,330 $,

4) AV = 12,337 $

Step-by-step explanation:

Given:

I = 10,000$

n = 3 years

p = 7% = 0.07

Accumulated value of an investment is calculated with next formula:

AV = I · (1 + (p/a))ᵃⁿ  where is:

AV - accumulated value

I - investment

p - interest

a - number of calculation parts during one year as the accounting period

n - number of years as the accounting period

1) money is compounded semiannually

a = 2 and  a · n = 2 · 3 = 6

AV = I · (1 + (p/a))ᵃⁿ = 10,000 · (1 + (0.07/2))⁶ = 10,000 · 1.229 = 12,290 $

AV = 12,290 $

2) money is compounded quarterly

a = 4  and   a · n = 4 · 3 = 12

AV = I · (1 + (p/a))ᵃⁿ = 10,000 · (1 + (0.07/4))¹² = 10,000 · 1.231 = 12,310 $

AV = 12,310 $

3) money is compounded monthly

a = 12  and  a · n = 12 · 3 = 36

AV = I · (1 + (p/a))ᵃⁿ = 10,000 · (1 + (0.07/12))³⁶ = 10,000 · 1.233 = 12,330 $

AV = 12,330 $

4) money is compounded continuously

Accumulated value of an investment continuously compounded is calculated with next formula:

AV = I · eⁿᵇ   where is:

n - number of years as the accounting period

b = p = 7% = 0.07

n · b = 3 · 0.07 = 0.21

AV = 10,000 e⁰²¹ = 10,000 2.7183⁰²¹ = 10,000 1.2337 = 12,337 $

AV = 12,337 $

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