Question

Keep in mind that regular annuities are assumed to take place at the end of the period. So when you make a car or house payment, while you make the payment on the first day of the month you are actually paying the interest for the past month. It's also very important to understand that interest rates are quoted as an annual rate, but if any compounding takes place more than once each year you must adjust your interest to use the tables. So a 10% interest rate for payments that happen each 6 months or semi-annually would require that you use the 5% column. 1. If you invest $5,000 at the end of each 6 month period beginning in 6 months,for 5 years at 8% interest, how much will you have at the end of the 5 years. Don't forget to adjust your interest rate when you go to the table as well as your number of periods.

Answer 1

Interest rate = 8 % p.a. or 8 %/2 = 4 % semiannually

Number of periods = 5 years x 2 periods = 10 Periods

Future value of annuity = Annual payment x FVIFA (Periodic rate, number of periods)

                                         = $ 5,000 x FVIFA (4 %, 10)

                                         = $ 5,000 x 12.006

                                         = $ 60,030

Fund size will be $ 60,030 in 5 years.