(2) Given: equal P; equal t

8% compounded semi-annually i^(2) =0.08 m=2 p t

___ compounded i^(4) =? m=4 p t

Let F1 be the future value when interest is compounded quarterly, and f2 be the future value when
interest is 8% compounded semi-annually.

F1=F2

P (1 + i^4/4) ^(4)t = P(1 + i^(2)/2^(2)t

(1 + i^ (4)/4)^4= (1 + 0.08/2)^2

(1 + i^ (4)/4)64 = (1.04)^2

1 + i^ (4)/4) = [(1.04)^2]^(1/4)

1 + i^ (4)/ (4) = (1.04)^1/2

1 + I ^ (4)/ (4) = 1.019804

i(4)/(4) = 1.019804 -1

i(4)/(4) = 0.019804

I(4) = (0.019804)(4)

i(4) = 0.079216 or 7.9216%

Answer: 7.9216% compounded quarterly

(3) Given: equal P; equal t

12% compounded monthly i^(2)= 0.12 m= 12 p t

____ compounded semi-annually i^(2)= ? m= 2 p t

Let F1 be the future value when interest is compounded semi-annually, and F2 be the future value when
interest is 12% compounded monthly.

F1=F2

P(1+i(2)/2(2)t = p(1+i(12)/12)(12)t

(1+i(2)/2)2 = (1+0.12/12)12

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Solution

F = P(1+j)^n

15,500 = 12,000(1+0.005)^n

log (15,500/12,000) = n log(1.005)

n=log(12,917)/log(1.005)=51.3145 periods

Answer: t=n/m=51.3145/12=4.28 years

3. Shirl is planning to invest P20,000. At what rate compounded semi-annually will accumulate her
money to P25,000 in 3 years?

Given: P=20,000 F=25,000 t=3 years m=2 n=mt=(2)(3)=6

Find: i^(2)

Solution. F=P(1+j)^n

25,000=(20,000)(1+j)^n

1.25=(1+j)^6

1.25^1/6=1+j

(1.25)^1/6-1=j

j=0.0379 or 3.79%

The interest rate in each conversion period is 3.79%

The nominal rate can be computed by

j=i^(12)/m

0.0379=i^(2)/2

i^(2)=(0.0370)(2)

Answer: ^(2)=0.0758 or 7.58%

4. What nominal rate compounded monthly is equivalent to 12% compounded annually? Round off your
answer to six decimal places.

Given: i(1)=0.12 m=1

Find i^(12)

Solution. F1=F2

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Example 3. At what nominal rate compounded semi-annually will P10,000 accumulate to P15,000 in 10
years?

Given: F=15,000 p=10,000 t=10 m=2 n=mt=(2)(10)=20

Find: i^(2)

Solution.

F=P(1+j)^n

15,000=10,000(1+j)^20

15,000/10,000=(1+j)^20

1.5=(1+j)^20

(1.5)^1/20=1+j

(1.5)^1/20-1=j

J=0.0205

The interest rate per conversion period is 2.05%.

The nominal rate (annual rate of interest) can be computed by

j=i^(m)/m

0.0205=i^(2)/2

i^(2)=(0.0205)(2)

i^(2)=0.0410 or 4.10%

Hence, the nominal rate is 4.10%

Example 4. At what interest rate compounded quarterly will money double itself in 10 years?

Given: F=2P t=10 years m=4 n=mt=(4)(10)=40

Find: i^(4)

Solution.

F=P(1+j)^n

2P=P(1+j)^n

2=(1+i)^40

(2)^1/40=1+j

(2)^1/40-1=j

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 J=0.0175 or 1.75%

The interest rate in each conversion period is 1.75%

The nominal rate can be computed by

j=i^(4)/m

0.0175=i(4)/4

i^(4)=(0.0175)(4)

i^(4)=0.070 or 7.00%

Therefore, the nominal rate that will double an amount of the money compounded quarterly in
10 years is 7.0%

Example 5. What effective rate is equivalent 10% compounded quarterly?

Given: i^(4)=0.10

m=4

Find: effective rate i^(1)

Solution

Since the equivalent rates yield the same maturity value, then

F1=F2

P(1+i^(1))^t= P[1+1^(4)/m]^ml

Dividing both sides by P results to

` (1+i^(1))^t= [1+1^(4)/m]^ml

Raise both sides to 1/t to obrtain

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P[1+i^(12)/m]mf = P(1+j)^1

[1+i^(12)/12]^12t= (1+i^(1))^t

[1+i^(12)/12]^12 =(1+0.12)

i^(12)/12=(1.12)^(1/12)-1=0.009489

i^(12)=12(0.009489)=0.113868 or 11.3868%

Answer; The nominal rate compounded monthly equivalent to 12% compounded annually is 11.3868%

5. What simple interest rate is equivalent to 10% compounded semi-annually at the end of year 1?

Given: i^(2) =0.10 m=2 t=1

Find:r

Solution.

Simple Interest Compound Interest

Fs = Fc

P(1+RsT) = P[1+i^(2)/m]

(1+Rst) =

[1+i^(2)/2]^2r

Substitute t=1 to obtain:

(1+Rs) = [1+i^(2)/2]^2

(1+Rs) = [1+0.10/2]^2

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