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Quarterly Compounding
Means that there are four compounding periods within the year. Instead of paying the interest once a year, it is paid in four equal installments after every three months. Using the above illustration, there will be eight compounding periods and the rate of interest for each compounding period will be 1:5 pet cent, that is 1/4 of 6 per cent).
Table 2.3 presents the relevant calculations reg

Semi-annual Compounding Table 2.2
Table 2.2 reveals that his savings will amount to Rs1.06090 and Rs 1.125.51 respectively at the end of’the first and second years
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Semi-annual Compounding
Means that there are two compounding periods within the year. Interest is actually paid after every six months at a rate of one-half of the annual (stated) rate of interest.
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Semi-annual and Other Compounding Periods
In the above examples, we have assumed annual compounding of interest at the end of the year. Very often the interest rates are compounded more than once in a year. Savings institutions, particularly, compound interests semi-annually, quarterly and even monthly.
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Annual Compounding
Table 2.1
Annual Compounding
This compounding procedure will continue for an indefinite number of years. The compounding of interest can be calculated by the following equation:
Thus, after substitution the actual figures' for the investment of Rs 1,000 in the formula A = P (1 + 1l), we arrive at the same result as in Table 2.1. This is the fundamental equation of . compound interest. The f

Example 2.1
If Mr X invests in a saving bank account Rs 1,000 at 5 per cent interest compounded annually. at the end of the first year, he will have Rs, 1.050 in his account. This amount constitutes the principal for earning interest for the next year. At the end of the next year, there would be Rs 1,102.50 in the account. This would represent the principal for the third year. The amount of interest earned would

TECHNIQUES
The preceding discussion has revealed that in order to have logical and meaningful comparisons between cash flows that result in different time periods it is necessary to convert the sums of money to a common point in time. There are two techniques for doing this: (1) Compounding, and (2) Discounting.

Compounding Technique
Interest is compounded when the amount carried on an initial deposit (the initial principal) becomes part of the principal at the end of the first compounding period. The term principal refers to the amount of money on which interest is received. Consider Example 2.1
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RATIONALE
Conceptually time value of money means that the value of a unit of money is different in different time periods, The value of a sum of money received today is more than its value received after some time Conversely, the sum of money received in future is less valuable than it is today. In other words, the present worth of a rupee received after some time will be less than a rupee received today, Since

TIME VALUE OF MONEY
INTRODUCTION
The object of this Chapter is,to illustrate the basics of the mathematics of finance, that the value of money. Recognition of the time value of money in financial decision making is extremely important. It is observed in Chapter 1 wealth maximization, as an objective of financial management. is superior to profit maximization caucus. among other things, the former incorporates t