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nominal annual interest rate

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1. Determine the value at the end of four years of a $10,000 investment (today) in a bank certificate of deposit (CD) that pays a nominal annual interest rate of 12 percent, compounded.

Do this for:

semi-annual
Quarterly
Monthly

2. Explain how diversification can reduce the risk of a portfolio of assets to below the weighted average of the risk of the individual assets.

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Solution Preview

1.We use the future value formula, where fv = pv(1+r)^n

if compounded semi-annual, then the semi annual interest rate would be 6% (12%/2) and you should have 8 periods (i.e. 2 half years per year times 4 years), so fv = 10000 X (1 + 0.06)^8 = 15938.48

similarly, if compounded ...

Solution Summary

The solution determines the value at the end of four years of a $10,000 investment in a bank certificate of deposit that pays a nominal annual interest rate. The values are determines for semi-annual, quarterly and monthly. The diversification can reduce the risk of a portfolio of assets to below the weighted average of the risk of an individual asset.

$2.19