Question

Mustafa is saving to buy a house. His goal is $600000. The interest rate is 4% compounded semi-annually, and his plan is to make deposits of $P at the end of every month for 4 years.

a) What is the effective monthly rate?

b) What is $P?

After 3 years, the interest rate changes to 5%.

c) How much money has he saved so far?

d) If he keeps on making the same monthly deposit, how much money will he have saved after 4 years?

e) If he still wants to save exactly $600000 by the end of 4 years, what should his monthly deposit be?

(Don't forget to include the future value of the money from part c)

Please include an explanation on how it's done AND if a formula is used can you explain that too? (i want to see the steps on how this was done not just an answer)

Answer 1

Part (a):

Effective monthly interest rate= 0.330589% as follows:

Part (b):

Monthly deposits (value of $P) = $11,555.06 calculated using PMT function of Excel as follows:

Part (c):

Amount saved by the end of year 3= $ 440,974.74 calculated using FV function of Excel as follows:

Part (d):

After 3 years, with increase in interest rate to 5% compounded semi annually, effective monthly interest rate during year 4 = 0.412392% as follows:

Amount saved after 4 years, keeping monthly deposits at the earlier level= $605,148.47 as follows:

Part (e):

Amount to be saved at the end of every month, during the year 4, in order to save total of $600,000 by the end of year 4 = $11,135.66 as follows: