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Question

If M > 1 and you solve the following equation to find i: PV * (1 + (i/M))M*N= FV, the i you get will be

A. the rate per compounding period.

B. the EYE.

C. the TOE.

D. the bond equivalent yield.

E. the EAR.

Solution

5 (1 Ratings )

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Question

If M > 1 and you solve the following equation to find i: PV * (1 + (i/M))M*N= FV, the i you get will be

A. the rate per compounding period.

B. the EYE.

C. the TOE.

D. the bond equivalent yield.

E. the EAR.

Solution

The answer is A (The rate per compounding period).

While calculating the future value or present value when the compounding is done more than one in a year then the interest rate and number of compounding changes according to the number of compounding.

Let’s understand this from this example,

Suppose in a investment the rate of interest is 10% per year, compounded annually, that means the compounding will be done once a year and the compounding period is also one in a year

Then i = 10%, n = 1

Now let’s suppose the compounding is done half yearly,

That means the M which is compounding period is 2

So the i will become i/M, 10/2 = 5%

Accordingly there are two half year in a single year so n will become 2.

Hope this answer your query.

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