Question

Future value. Grand Opening Bank is offering a one-time investment opportunity for its new customers. A customer opening a new checking account can buy a special savings bond for $200 today, which the bank will compound at 6.5% for the next ten years. The savings bond must be held for at least five years, but can then be cashed in at the end of any year starting with year five. What is the value of the bond at each cash-in date up through year ten? (Use an Excel spreadsheet to solve this problem.) What is the value of the savings bond at the end of year five? $ (Round to the nearest cent.)

Answer 1

Value of the bond = FV of the initial amount compounded at interest rate

So, after 5 years, value = PV*(1+r)^5 = 200*(1.065^5) = $274.02

similarly, all price are calculated using excel:

A B 1 Current price of the bond $ 200.00 2 interest rate offered 6.50% 3 4 So, value of bond at the end of year 5 $ 274.02 $B$1*(1+$B$2)45 5 So, value of bond at the end of year 6 $ 291.83 $B$1*(1+$B$2)^6 6 So, value of bond at the end of year 7 $ 310.80 $B$1*(1+$B$2)^7 7 So, value of bond at the end of year 8 $ 331.00 $B$1*(1+$B$2)^8 8 So, value of bond at the end of year 9 $ 352.51 $B$1*(1+$B$2)^9 9 So, value of bond at the end of year 10 $ 375.43 $B$1*(1+$B$2)^10 10