Question

How much will be in a high-yield account at Abu Dhabi Commercial Bank 12 years from now if you deposit $5000 now and $7000 five years from now? The account earns interest at a rate of 8% per year, compounded quarterly.

		$25,123
		$26,900
		$29,150
		$32,250

Answer 1

To solve this question we can use the formula for compounding. The formula is X(1+r)^t

That is if invest X amount today at annual interest r which is compounded annually after t years it will be equal to, X(1+r)^t.

But in this question we have to make few changes in our formula singe the compounding is happening quarterly that is 4 times a year.

When there are n periods of compounding per year, the formula becomes. X(1+r/n)^tn

Where X is the amount invested

r= interest rate per annum

n= period of compounding per years

t= number of years for which investment is done.

First we deposit 5,000$ for 12 years and 7,000$ five year from now that is it is deposited for 12-5= 7 years.

5,000 invested today at 8% per year compounding quarterly will turn into after 12 years

= 5000(1+0.08/4)^4×12

= 5000(1+0.02)^4×12

= 5000(1.02)^48

=5000×2.5870

= $12, 935.352.

Now let's calculate how much the second investment will turn into

= 7000(1+0.08/4)^7×4

=7000(1.02)^28

=7000×1.7410

= $12,187.1695.

Total return on investment will be equal to,

= 12,935.352+12,187.1695

= $25,122.5215

Or $25,123 approx.

So the correct answer will be option 1 $25,123.