Question

Suppose that you have $50,000 in cash today. You want to find a bank account that offers an interest rate that will allow you to make withdrawals to pay your monthly expenses of $1,000, beginning one month from today, for 5 years before exhausting the account. Assume that any savings account we consider pays interest monthly (i.e., monthly compounding). What APR must the account offer in order for you to achieve your goal?

Answer 1

Present Value of cash = $50,000

Periodic monthly payment from account at the end of each month= $1,000

No of monthly paymenst = 5 years*12 = 60

calculating the Monthly Interest rate earned on account using Excel "rate" function;-

Monthly Interest rate = 0.6183%

Annual Nominal Interest rate = 0.6183%*12 = 7.4196%

So, APR must the account offer in order for you to achieve your goal is 7.42%

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