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Answer: d) $425.10
Compute the two future values and compare them. 1. **Original future value using 7.0% effective annual rate** \[ FV_{EA} = 10000(1.07)^{10} \approx 19{,}671.51 \] 2. **Revised future value using 7.0% nominal rate compounded monthly** \[ FV_{m} = 10000\left(1+\frac{0.07}{12}\right)^{120} \approx 20{,}096.61 \] 3. **Difference** \[ 20{,}096.61 - 19{,}671.51 \approx 425.10 \] So the revised repayment is about **$425.10 greater**.
Author: Manit Arora
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Q-712.2. Richard plans to invest $10,000.00 today in a zero-coupon bond with a promised return of 7.0% per annum. This return is possible because he will not be repaid until the bond matures in ten (10) years. He calculates the future principal repayment, but his calculation assumes the rate is an equivalent annual interest rate; aka, effective annual rate. His advisor informs him that the actual rate is 7.0% per annum with monthly compounding. Compared to his original future value, how many dollars greater is Richard's revised future principal repayment?
A
a) Zero
B
b) $39.80
C
c) $215.75
D
d) $425.10
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