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Your company has decided to set up a fund for its employees with an initial payment of Rs 27,500...

Question:

Your company has decided to set up a fund for its employees with an initial payment of Rs 27,500 compounded six-monthly over a four-year period at a six monthly interest of 3.5%.

a) Calculate the size of the fund at the end of 4 years.

b) Calculate the effective annual interest rate.

c) Show that P=A/r. for an ordinary annuity to infinity.

Effective Annual Rate:

The effective annual rate refers to the actual interest received or paid for an investment which is a result of regular compounding for a particular period of time. Effective annual rate is also referred to as an annual equivalent rate.

Answer and Explanation: 1

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a) Calculation of size of the fund:

{eq}\begin{align*}{\rm\text{Size}}\;{\rm\text{of the}}\;{\rm\text{fund}} &=...

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Effective Annual Rate: Formula & Calculations

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Chapter 7 / Lesson 6
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Know the definition of the effective annual rate (EAR), see the formula for calculating the effective annual rate, and explore some examples on how to calculate the effective annual rate.


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