BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Interest compounded more than once in a year
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Interest is calculated for a number of years
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Interest compounded anually
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Detailed explanation-1: -Answer: Multi-period investments require a slightly more complex equation, where interest gets compounded based on the number of periods the investment spans. As a result of multiple periods, it is usually a good idea to calculate the average rate of return (cumulatively) over the lifetime of the investment.
Detailed explanation-2: -Compounding interest more than once a year is called “intra-year compounding". Interest may be compounded on a semi-annual, quarterly, monthly, daily, or even continuous basis. When interest is compounded more than once a year, this affects both future and present-value calculations.
Detailed explanation-3: -Example: “10%, Compounded Semiannually" Semiannual means twice a year.
Detailed explanation-4: -Continuous Compounding of Interest If an annual interest rate compounds annually, then it should be compounded once a year. If an annual interest rate compounds semi-annual, then it should be compounded twice a year. If an annual interest rate compounds quarterly, then it should be compounded 4 times per year.