Compounding frequency and time value François plans to invest $4,000 in an individual savings account (ISA) at a nominal interest rate of 6%.

a. How much will François have in the account after 10 years if interest is compounded (1) annually, (2) semi-annually, and (3) daily (assuming 365-day year).

b. What is the effective annual rate (EAR) for each compounding period in part a?

c. How much greater will François’ ISA balance be if the interest is compounded continuously rather than semi-annually for the same period?

d. Consider your answers in parts a, b, and c. What does it indicate about the relationship between compounding frequency and the compound value for nominal interest rates?

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