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Financial Mathematics Old FM Forum 

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#1




Interest rate compound periods?
In the 13th edition of the ASM FM manual, for #4 in the Past Exam Questions on Section 8a to 8c, it reads that Lenny buys a stock for 200 which pays a dividend of 12 at the end of every 6 months. Lenny deposits the dividend payments into a bank account earning a NOMINAL interest rate of 10% convertible semiannually. Then in the solution for this question, it says that the accumulated value of Lenny’s dividends at the end of 10 years is 12 s angle 20 at .05.
Isn’t the effective interest rate for the AV of the dividends supposed to be s angle 20 at j with j = (1 + .1/2)^2  1 = .1025, since you’re supposed to work with the EFFECTIVE interest, not the nominal? 
#2




The solution is OK. You could interpret this as a 10 year annuity, paying semiannually, at an effective rate of .1025 per year. Or, as the solution does, you can call it a 20 period annuity at an effective rate of .05 per period.

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