An equation of the form y=1 = 7000 (1.09)* provides an example of interest compounded annually. This means that the full 9% of interest is added to the account at the end of one year. This doesn't sound very fair to someone that invests their money for 11 months-they get no interest at all. This became a competitive disadvantage for financial institutions, and some began to divide the annual interest into periodic shares, so that (for example) you could get 1/12th of that 9% each month. When this happens, we say that interest is compounded monthly. Interest can also be compounded weekly (52 times per year), quarterly (4 times per year), daily (365 times per year), or really any other period you could think of. If interest is compounded monthly, what growth factor would be needed to provide 1/12th of 9% interest each month? (Think about the difference between interest rate and growth factor.) The growth factor would be X

An equation of the form y=1 = 7000 (1.09)* provides an example of interest compounded annually. This means that the full 9% of interest is added to the account at the end of one year. This doesn't sound very fair to someone that invests their money for 11 months-they get no interest at all. This became a competitive disadvantage for financial institutions, and some began to divide the annual interest into periodic shares, so that (for example) you could get 1/12th of that 9% each month. When this happens, we say that interest is compounded monthly. Interest can also be compounded weekly (52 times per year), quarterly (4 times per year), daily (365 times per year), or really any other period you could think of. If interest is compounded monthly, what growth factor would be needed to provide 1/12th of 9% interest each month? (Think about the difference between interest rate and growth factor.) The growth factor would be X

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter17: Capital And Time

Section: Chapter Questions

Problem 17.6P

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