Question

1. Allen Paige is planning to invest $10,000 in a bank certificate of deposit (CD) for five years. The CD will pay interest of 9 percent compounded annually. What is the future value of Allen’s investment? How much would that investment be if Allen received simple interest only instead of compounded interest?

2. Mary Grace expects to need $50,000 for a down payment on a house in six years. How much would she have to invest today in an account paying 7 percent to have $50,000 in six years?

3. Katerina Munroe has $10,000 that she can deposit into a savings account for five years. Bank A compounds interest annually, Bank B twice a year, and Bank C quarterly. Each bank has a stated interest rate of 4%. What account balance would Katerina have at the end of the fifth year if she left all the interest paid on deposit in each bank?

Please write out the formulas and the answers

Answer 1

1)

Future value – Annual compounding = P×(1+r)^n

Future value – Simple interest= P×(1+r×n)

P is payment

r is interest rate per period

n is number of periods

Future value – Annual compounding:

= $10,000×(1+9%)^5

= $15,386.24

Future value – Simple interest:

= $10,000×(1+9%×5)

= $14,500