Question

1) How much will you have accumulated over a period of 35 years if, in an IRA which has a 10% interest rate compounded monthly, you annually invest:

a. $1

b. $5000

c. $8,000

d. Part (a) is called the effective yield of an account. How could Part (a) be used to determine Parts (b) and (c)? (Your answer should be in complete sentences free of grammar, spelling, and punctuation mistakes.)

Answer 1

Ans:

Life : 35 years

Compounding period : monthly

Number of compounding period : 35*12 = 420

Interest rate : 10%

Periodic Interest rate : 10%/12 = 0.8333%

Value of Investment after 35 Years: Principal *(1+ Periodic Interest rate)^(Number of period in compunding)

a.

When Investment amount is $1:

= 1*(1+0.8333%)^(420) = $32.63865

b.

When Investment amount is $5,000:

= 5,000*(1+0.8333%)^(420) = $163,193.30

c.

When Investment amount is $8,000:

= 8,000*(1+0.8333%)^(420) = $211,109.20

2.

Where Part (a) is called the effective yield of an account:

part (b) and (c) can be calculated by multiplying the value of investment in part be by the effective yeild calculated in part (a).

Effective yeild as per part (a) from investment of $1 : $32.63865 (therefore for every $ invested amount accumulated after 35 years @10% compounded monthly will be $32,63865)

part (b) = $5,000 * 32.63865 = $163,193.30

part (c) = $8,000 * 32.63865 = $211,109.20

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