An amount of 5,000 is invested at a fixed rate of 8 per cent per annum. What amount will be the value of the investment in five years time, if the interest is compounded every six months?

With slight modifications, the basic formula can be made to deal with compounding at intervals other than annually.

Since the compounding is done at six-monthly intervals, 4 per cent (half of 8 per cent) will be added to the value on each occasion.

Hence we use r = 0.04. Further, there will be ten additions of interest during the five years, and so n = 10. The formula now gives:

V = P(1 + r)10 = 5,000 x (1.04)10 = 7,401.22

Thus the value in this instance will be £7,401.22.

In a case such as this, the 8 per cent is called a nominal annual

rate, and we are actually referring to 4 per cent per six months.