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Old 04-18-2019, 11:54 AM
ActuaryHopeful ActuaryHopeful is offline
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Post 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 Lennyís dividends at the end of 10 years is 12 s angle 20 at .05.

Isnít 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 youíre supposed to work with the EFFECTIVE interest, not the nominal?
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Old 04-18-2019, 01:01 PM
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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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Old 04-18-2019, 01:54 PM
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Originally Posted by Gandalf View Post
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.
You should do the math both ways and verify that they are equivalent for your own benefit.
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