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CMA Foundation · Fundamentals of Business Mathematics and Statistics · Time Value of Money and Annuity - Simple and Compound Interest

A sum of money invested at 12% per annum compounded quarterly is considered for 6 months. Which pair of rate per period and number of periods should be used to find the amount?

Use 3% per period for 2 periods. A nominal 12% compounded quarterly gives 3% each quarter, and six months contains two quarters. Using 6% would wrongly apply a half-yearly rate, and 6 periods would confuse months with quarters.

  1. A6% per period for 2 periods
  2. B3% per period for 2 periodsCorrect
  3. C3% per period for 6 periods
  4. D12% per period for 0.5 periods

Explanation

Quarterly rate = 12%/4 = 3%. Six months contains 2 quarters, so n = 2. Using 6% would treat the rate as half-yearly, and 6 periods would count months as quarters.

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