Question

If you invest $5,000 today into a deposit account earning 6.25% interest compounded monthly, how much would your investment be worth in 5 years?

Answer 1

Solution :

The formula for calculating the future value of an Investment with compound Interest is

= P ( 1 + (r/n) ) ^{n * t}

Where

P = Principal   ;   r = rate of interest   ; n = No. of compounding periods per year ; t = Time in years

As per the information given in the question we have

P = $ 5,000   ; r = 6.25 % = 0.0625 ; n = 12   ;   t = 5

Applying the above values in the formula we have

= 5,000 * ( 1 + ( 0.0625 / 12 ) ) ^{12 * 5}

= 5,000 * ( 1 + 0.005208 ) ) ^{12 * 5}           

= 5,000 * ( 1 + 0.005208 ) ⁶⁰

= 5,000 * ( 1.005208 ) ⁶⁰

= 5,000 * 1.365703 = $ 6828.5150

= $ 6829 ( When rounded off to the nearest dollar )       

Thus if $ 5,000 is invested today into a deposit account earning 6.25% interest compounded monthly, the investment be worth $ 6829 in 5 years .

Note : ( 1.005208 )⁶⁰ is calculated using the excel formula

=POWER(Number,Power) = POWER(1.005208,60) = 1.365703