Calculate the future value of $2,000 in a. 3 years at an interest rate of 10% per year. b. 6 years at an interest rate of 10% per year. c. 3 years at an interest rate of 20% per year. d. Why is the amount of interest earned in part (a) less than half the amount of interest earned in part (b)?

Calculate the future value of $2,000 in a. 3 years at an interest rate of 10% per year. b. 6 years at an interest rate of 10% per year. c. 3 years at an interest rate of 20% per year. d. Why is the amount of interest earned in part (a) less than half the amount of interest earned in part (b)?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter4: Time Value Of Money

Section4.17: Amortized Loans

Problem 1ST

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Concept explainers

Effective Interest Rate

The term interest rate can be defined as the amount that is charged by the lender as a percentage on the principal amount. Interest rate which is charged annually is known as annual percentage rate.

Question

Calculate the future value of $2,000 in
a. 3 years at an interest rate of 10% per year.
b. 6 years at an interest rate of 10% per year.
c. 3 years at an interest rate of 20% per year.
d. Why is the amount of interest earned in part (a) less than half the amount of interest earned in part (b)?

Expert Solution

Step 1

Future value = Present value ×(1+pir) ^n

Where,

Pir = Periodic interest rate

n = number of periods

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