The Monday MBA Math series helps prospective MBA students to self assess their proficiency with the quantitative building blocks of the MBA first year curriculum.
With this post, we begin our second pass through the main MBA Math topics of finance, accounting, economics, and statistics.
This exercise extends the first Monday MBA Math finance exercise by compounding interest more frequently than once per year as a single starting investment grows over time. Sub-annual compounding typically involves finite compounding such as semi-annually, quarterly, monthly, and daily. But it also includes continuous compounding, which is a logical limit to the process of ever-decreasing time slices.
Given four of the five parameters of starting value, total duration, rate, compounding period, and final value, the fifth can be solved using the time-value-of-money formulas.
Quantitative finance builds incrementally, starting with simpler concepts (like annual compounding) and adding successive levels (like sub-annual compounding). Starting your MBA coursework with a working knowledge of the time-value-of-money foundations helps you to keep up as the incremental layers are added in quick succession.
You deposit $500 in a bank account that pays 7% stated annual interest compounded semi-annually. What is the value of your investment at the end of 4 years?
Solution (with audio commentary): click here