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Simple Compound Interest Question

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by Balrog1978 » Sun Dec 12, 2010 9:14 am
I'm brushing up my PS skills for GMAT had a simple question around calculating the value of n (number of times compounded) in COmpound Interest Problems.

A = P[1 + (r/n)]^nt
where
P = Principal
r = rate
n = compounded
t = number of years

In the case where, say time is 14 years and the question asks compounded semi-annually :
n = 2
However, if the question asks (hypothetically) the number of years is 6 months and compounded semi-anually,
is n = 2 or n = 1 (since technically semi-annual compounding can happen only once?)
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Source: — Problem Solving |

by Geva@EconomistGMAT » Sun Dec 12, 2010 12:53 pm
n will still equal 2, but t (number of years) will equal 1/2, ending up with only a single "jump" in interest. For example, if your loan incurred 10% annual interest, compounded semiannually, then after 6 months the balance would be P[1 + (10%/2)]^2*1/2 = P[1+5%}^1 = P(1.05)

It pays to use simple numerical examples (and perhaps a quick drawn time line) in these questions, rather tha just relying on an abstract formula.
Geva
Senior Instructor
Master GMAT
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by Balrog1978 » Mon Dec 13, 2010 7:10 am
Thanks!!!
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