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LG5<br />
semiannual compounding<br />
Compounding of interest over<br />
two periods within <strong>the</strong> year.<br />
CHAPTER 4 Time Value of Money 153<br />
Spreadsheet Use The present value of <strong>the</strong> mixed stream of future cash flows<br />
also can be calculated as shown on <strong>the</strong> following Excel spreadsheet.<br />
Paying about $1,905 would provide exactly a 9% return. Frey should pay no<br />
more than that amount for <strong>the</strong> opportunity to receive <strong>the</strong>se cash flows.<br />
Review Question<br />
4–11 How is <strong>the</strong> future value of a mixed stream of cash flows calculated? How<br />
is <strong>the</strong> present value of a mixed stream of cash flows calculated?<br />
Compounding Interest<br />
More Frequently Than Annually<br />
Interest is often compounded more frequently than once a year. Savings institutions<br />
compound interest semiannually, quarterly, monthly, weekly, daily, or even<br />
continuously. This section discusses various issues and techniques related to <strong>the</strong>se<br />
more frequent compounding intervals.<br />
Semiannual Compounding<br />
Semiannual compounding of interest involves two compounding periods within<br />
<strong>the</strong> year. Instead of <strong>the</strong> stated interest rate being paid once a year, one-half of <strong>the</strong><br />
stated interest rate is paid twice a year.<br />
EXAMPLE Fred Moreno has decided to invest $100 in a savings account paying 8% interest<br />
compounded semiannually. If he leaves his money in <strong>the</strong> account for 24 months<br />
(2 years), he will be paid 4% interest compounded over four periods, each of
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