An income annuity with quarterly payments earns 6% compounded monthly. What is the value of c? What is the approximate value of the periodic rate of return for one payment interval? Will the correct value be larger or smaller than your estimate? Explain.

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Jesus Marquez · Accepted Answer

Final Answer :  c =  Number of compounding periods per year   Number of payments per year  = 12 4 = 3 c=\frac{	ext { Number of compounding periods per year }}{	ext { Number of payments per year }}=\frac{12}{4}=3 c =  Number of payments per year   Number of compounding periods per year  ​ = 4 12 ​ = 3   The periodic rate of return is approximately equal to 6%/4 = 1.5% per quarter. The correct value will be larger than 1.5% because i = 0.5% per month will compound three times in a 3-month payment interval.

An income annuity with quarterly payments earns 6% compounded monthly. What is the value of c? What is the approximate value of the periodic rate of return for one payment interval? Will the correct value be larger or smaller than your estimate? Explain.

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