ECONOMICS
COMPOUND INTEREST
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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None of these
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Detailed explanation-1: -The compound interest formula is ((P*(1+i)^n)-P), where P is the principal, i is the annual interest rate, and n is the number of periods.
Detailed explanation-2: -Nominal Rate = Rate per Period x Periods per Year 1) Future amount, principal, periods per year and number of years should be given. 2) Divide the future amount by the principal amount. 3) Get the nth root of the quotient where n is the number of periods.
Detailed explanation-3: -It states that the nominal interest rate is approximately equal to the real interest rate plus the inflation rate (i = R + h). For example, a bond investor is expecting a real interest rate of 5%, when the market shows an expected inflation rate of 3%.
Detailed explanation-4: -In this case, the nominal annual interest rate is 10%, and the effective annual interest rate is also 10%. However, if compounding is more frequent than once per year, then the effective interest rate will be greater than 10%. The more often compounding occurs, the higher the effective interest rate.