Must follow grading Rubics at bottom of assignment 100%!!!

Compounding Periods

Usually interest rates are quoted on an annual basis (APR) although interest may actually be paid semiannually, quarterly, monthly, daily, or even continuously. 10% compounded monthly or 12% compounded quarterly rates are called stated rates or nominal rates. They differ from the rate that is effectively earned because of the compounding effect in the annual period. For example 10% compounded semiannually does not provide the same return as 10% compounded annually. 10% compounded semiannually is actually 5% for a six-month period. In this case the periodic rate is 5% and effective annual rate is higher than 10%.

To calculate the periodic rate you need to divide the stated rate by the number of periods per year, as shown:

Periodic rate = [stated rate/Number of periods per year ] = APR/m

To calculate the Effective Annual Rate (EAR) use the following formula:

EAR = (1 + periodic rate)(# of periods/year) – 1

The equation for EAR is:

re = (1 + rp)m -1

where, re represents the effective annual rate, rp represents the periodic rate, and m represents the number of periods per year.

Example: What is the effective yield for a stated rate of 9% when interest is compounded semiannually and monthly?

Solution:

Rate of 9% compounded semiannually provides a return of:

1.045 * 1.045 = 1.092025
So 1.092025 – 1 = 9.2025%

Rate of 9% compounded monthly provides a return of:

(1.0075)12 – 1 = 9.3806898%

Using a financial calculator:

NOM = 9; C/Y = 2 Compute EFF = 9.2025%
NOM = 9; C/Y = 12 Compute EFF = 9.3807%

We will now apply the time value of money concept to real-world financial applications.Assignment 2 Grading Criteria
Maximum Points
Calculated the compounded interest over 20 years and evaluated the value of the savings account upon closing. (CO 1)
32
Calculated the bonus payout over 20 years vs. a one time payout with interest and distinguished which bonus option would be better for the client. (CO 1)
32
Calculated the present value of the bonus and analyzed the difference in bonus for the client. (CO 2)
32
Analyzed the tuition costs for the client and determined what the future costs will be and determined how these funds can be accumulated over time. (CO 4)
60
Written Components: Organization, usage and mechanics, APA elements, style
44
Total:
200
LASA Rubric