FRM Part I · FRM Exam Part I · Properties of Interest Rates
A deposit of $2,000 earns 8% per annum compounded semiannually. What is the value after 3 years, to the nearest dollar?
The deposit grows to about $2,531. With semiannual compounding the periodic rate is 4% over six periods, so the value is 2,000 times 1.04 to the sixth power, which is 1.2653, giving $2,530.64. Annual compounding would understate the result.
- A$2,531Correct
- B$2,520
- C$2,497
- D$2,560
Explanation
Semiannual rate is 4% with 6 periods: 2,000 x 1.04^6 = 2,000 x 1.265319 = $2,530.64, about $2,531. Using annual compounding gives 2,000 x 1.08^3 = $2,519 (about $2,520), which ignores the compounding frequency.
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