Question 3.2: Determine the actual value of the $10,000 investment for the...

The composite interest rate can be determined using Eq. (3.11):

θ=\frac {i- λ}{1+λ}=\frac {0.07 -0.04}{1+ 0.04}=0.02885          (3.11)

Using Eq. (3.10) with P = $10,000 and N = 10, the investment will accumulate to the total amount F:

F=P(\frac {1+i}{1+λ})^{N}=P(1+\frac {i- λ}{1+λ})^{N}        (3.10)

F = $10,000 * (1+ 0.02885)^{10} = $13,290