Question

You will deposit $400 per year for the next 5 years. You expect the interest rate 1 year from now to be 8%, 2 years from now to be 7%, 3 years from now to be 8%, and 4 years from now to be 4%. If your forecast of interest rates is correct, how much money will you have 5 years from now? Round your answer to 2 decimal places, for example 100.12.

This is all the information I was given for this question. Please help!

Answer 1

Annual Deposit = $400
Interest Rate during Year 2 = 8%
Interest Rate during Year 3 = 7%
Interest Rate during Year 4 = 8%
Interest Rate during Year 5 = 4%

Future Value = Amount Deposited * (1 + Interest Rate)^Period

Accumulated Sum = $400 * (1.08*1.07*1.08*1.04) + $400 * (1.07*1.08*1.04) + $400 * (1.08*1.04) + $400 * 1.04 + $400
Accumulated Sum = $400 * 1.29797 + $400 * 1.20182 + $400 * 1.12320 + $400 * 1.04 + $400
Accumulated Sum = $2,265.20

So, you will have $2,265.20 after 5 years.