Question

32. Explain why investing $1000 at 4% interest, compounded continuously, for 2 years is

equivalent to investing $1000 at 8% interest for 1 year.

Answer 1

Explanation:

Your basic future value formula is:

FV = PV (1+i) ^ n

Where:

FV = Future Value

PV = Present value = $1000

i = interest rate per period = 8/2 = 4% = 0.04

n = number of periods = 6 semi annual periods