Question

2) A bank is offering 12 percent compounded quarterly. If you put $100 in an account, how much will you have at the end of one year? What’s the EAR? How much will you have at the end of two years?

Answer 1

We use the formula:
A=P(1+r/4)^4n
where
A=future value
P=present value
r=rate of interest
n=time period.

At end of one year;

A=$100*(1+0.12/4)^(4*1)

=100*1.12550881

=$112.55(Approx).

At end of two years;

A=$100*(1+0.12/4)^(4*2)

=100*1.26677008

=$126.68(Approx).

EAR=[(1+APR/m)^m]-1
where m=compounding periods

=[(1+0.12/4)^4]-1

=12.55%(Approx).