An amount equal to $25000 is invested in an alternative that gives returns at the rate of 8% per annum compounded every six months. The first payment from the investment is received six months after it is made followed by one after every six months. The value of each payment has to be determined.
It should be noted that as payments are made after a duration of time equal to six months and the term of compounding is also 6 months, the problem reduces to that of simple interest. The formula for compound interest is applicable only where interest is earned on the interest that has already been earned; that is not the case here.
The payment received every six months is equal to 25000*(8/100)*(1/2) = $1000
A payment of $1000 is received once every six months.