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.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter4: Time Value Of Money

Section: Chapter Questions

Problem 34P

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