Question

You are considering saving $10,000 in a bank certificate of deposit. Stated interest rate is 9%. Find:

1. The future value in 20 years with quarterly compounding.

2. What is effective rate with quarterly compounding?

3. You anticipate needing $30,000 for a down payment on a home in six years. If you earn 6%, how much must you set aside now to achieve this?

4. Referring to #3, how much would you have to set aside at the end of each year, instead of now, to achieve the $30,000 objective?

5. You have begun a 401k at work, contributing $1,000 at the end of each year. How much is your account worth in forty years, assuming a 6% rate of interest?

Answer 1

Time value of money refers to the concept in which it is dominantly stated that the present value of money which is to be received in future will be low after removing the effect of interest factor.

For the given problem, an excel sheet has been attached herewith for each of the case. Also for reference and understanding of concepts also refer to formula sheet attached herewith.

Following is the formula table for computation of each of the value for each case:

Following is the computation of value for each of the case as follows:

In the above excel sheets, the solutions have been highlighted with the yellow colour, also for computation of value the formula sheet attached in first place can be referred.

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