Question

Western Energy makes quarterly deposits into an account reserved for purchasing new equipment two years from now. The interest paid on the deposits is 12% per year, compounded monthly. Identify the interest period, compounding period, and compounding frequency in the interest period.
a. The interest period is ____________.
b. The compounding period is _______________ .
c. The compounding frequency is___________ .

Answer 1

Answer:

a. 2 years

b. 1 year

c. 12 times

Explanation:

Interest period is the duration of the deposit. It is the length of time the money would remain in deposit. This is 2 years according to the question

Compounding period = number of times interest would be paid. In the question, this is a year. So interest would be paid every year

The compounding frequency - it is the number of times the deposit would be compounded. It is 12 months

The future value of the deposit can be determined using this formula :  

FV = P (1 + r/m)^nm

FV = Future value  

P = Present value  

R = interest rate  

N = number of years

m = number of compounding