Multiple Choice
What is the effective annual rate (EAR) of a 6\% annual percentage rate (APR) compounded daily? (Assume 365 days in a year.)
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10. Time Value of Money
Time Value of Money Equations
Multiple Choice
Which of the following will increase the future value of an annuity, assuming all other factors remain constant?
A
Increasing the interest rate
B
Decreasing the number of payment periods
C
Reducing the amount of each periodic payment
D
Making payments at the end of each period instead of the beginning
Verified step by step guidance1
Understand the concept of future value of an annuity: The future value of an annuity is the total value of a series of payments made at regular intervals, compounded at a specific interest rate over time.
Identify the factors affecting the future value of an annuity: These include the interest rate, the number of payment periods, the amount of each periodic payment, and the timing of payments (beginning or end of the period).
Analyze the impact of increasing the interest rate: A higher interest rate increases the compounding effect, leading to a higher future value of the annuity. This is because the payments grow faster due to the increased rate of return.
Evaluate the effect of decreasing the number of payment periods: Reducing the number of payment periods decreases the total number of payments and the compounding effect, which would lower the future value of the annuity.
Consider the impact of reducing the amount of each periodic payment and changing the timing of payments: Reducing the payment amount directly lowers the total contributions, decreasing the future value. Making payments at the end of each period instead of the beginning reduces the compounding time for each payment, also lowering the future value.
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