Question

What is the future value of $500 paid at the end of each quarter (i.e. every three months) for the next 5 years if the interest rate is 7% per year, compounded quarterly? The future value of the annuity is $. (Round to the nearest dollar.)

Answer 1

The future value is computed as shown below:

Future value = quarterly payment x [ [ (1 + r)ⁿ – 1 ] / r ]

r is computed as follows:

= 7% / 4 (Since the amount are quarterly, hence divided by 4)

= 1.75% or 0.0175

n is computed as follows:

= 5 x 4 (Since the amount are quarterly, hence multiplied by 4)

= 20

So, the amount will be as follows:

= $ 500 x [ [ (1 + 0.0175)²⁰ - 1 ] / 0.0175]

= $ 500 x 23.70161119

= $ 11,851 Approximately

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