Question

Appendix A

$Appendix_A.jpg$

You invest $3,000 in a certificate of deposit that matures after eight years and pays 5 percent interest, which is compounded annually until the certificate matures. Use Appendix A to answer the questions. Round your answers to the nearest dollar.

1. How much interest will you earn if the interest is left to accumulate?
   $   

2. How much interest will you earn if the interest is withdrawn each year?
   $   

Answer 1

Present value = Future value/(1+i)^n

i = interest rate per period

n= number of periods

a)

Future value = 3000 * interest factor

= 3000 * 1.477

= 4431

hence interest earned = 4431 - 3000 = 1431

b)

interest earned = 3000 * 5% * 8 = 1200