Question

Linda Williams is saving to buy a house in five years. She plans to put 20 percent down at that time, and she believes that she will need $37,000 for the down payment. If Linda can invest in a fund that pays 9.20 percent annual interest, compounded quarterly, how much will she have to invest today to have enough money for the down payment?

Answer 1

We have to find the principal amount which we have to deposit today which after 5 years (compounded quarterly at 9.2%) will become 37,000.

$P*(1+\frac{0.092}{4})^{4*5}=37000$

$P*1.023^{20}=37000$

Which gives us P= $P=37000/1.023^{20}=23479.51$ ​​​​​​

Therefore, P = $23,479.51

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