Question

If you invest $6,000 for one year at a nominal interest rate of 8%. Interest is compounded quarterly. Calculate the following:

Number of periods to be compounded

Total amount to be repaid

Total interest earned

Answer 1

Number of periods to be compounded: 4 (quarters)

Interest rate per quarter is 8/4=2%. Growth after 1 year (4 quarters)=1.02⁴=1.08243216.

Total amount to be repaid: 6000×1.02⁴=$6,494.59

Total interest earned: $6,494.59-$6,000=$494.59

(For your information, if this had been simple interest, the interest would have been only $480.)