Question

An young graduate invests $1,000 today in an account that pays 6% APR with monthly compounding. What is the future value of this one time investment in five years?

Answer 1

Solution: Future value = Present value* (1+r)" Wherer is interest rate=0.0617 or 6.17% nis period of investment = 5 years Future value = $1,000*(1.0617) = $1.000*1.3490 Future value = $1,349 So future value of this investment in five years is $1,349 Note: Effective annual rate (EAR)=(1+(i/n) --1 n=number of compounding periods per year = 12 i= Nominal annual rate = 5.89% or 0.0589 Effective annual rate= (1 + (0.05/12) 12 - 1 =(1.005) 12-1 = 1.0617-1 Effective annual rate=0.0617 or 6.17%