Suppose your bank account pays interest monthly at an effective annual rate of 6% with monthly compounding available. You have no money in the bank today. You want to know how much you will need to save at the end of each month to accumulate $100,000 in 10 years? You use the FV annuity formula to determine that you need to deposit $615.47 at the end of each month to accumulate $100,000 in 10 years. In determining that you need to deposit $615.47 each month, the first calculation you performed was the conversion of EAR at 6% to a monthly rate of .4868%. Question: 1). Why did you use calculate the monthly interest factor of .004868 or 4868% H instead of .005 or .5% monthly rate (6%/12 months) to solve this problem? Show computation to support your answer.
Suppose your bank account pays interest monthly at an effective annual rate of 6% with monthly compounding available. You have no money in the bank today. You want to know how much you will need to save at the end of each month to accumulate $100,000 in 10 years? You use the FV annuity formula to determine that you need to deposit $615.47 at the end of each month to accumulate $100,000 in 10 years. In determining that you need to deposit $615.47 each month, the first calculation you performed was the conversion of EAR at 6% to a monthly rate of .4868%. Question: 1). Why did you use calculate the monthly interest factor of .004868 or 4868% H instead of .005 or .5% monthly rate (6%/12 months) to solve this problem? Show computation to support your answer.
Chapter4: Time Value Of Money
Section: Chapter Questions
Problem 34P
Related questions
Question
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 5 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
Pfin (with Mindtap, 1 Term Printed Access Card) (…
Finance
ISBN:
9780357033609
Author:
Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:
Cengage Learning
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:
9781337788281
Author:
James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT