Question

Steve Lee contributes $1035 at the end of every 3 months into an RRSP. Interest on the account is 6% compounded monthly.

a) What will be the balance after nine years?

b) How much of the balance will be interest?

c) If Steve converts the balance after nine years into an RRIF earning 5% compounded monthly and makes equal withdrawals at the end of every three months for eight years, what is the size of the withdrawal?

Answer 1

a

Particulars	Amount
Given APR	6.00%
Given compounding frequency per year	12
Effective annual rate	6.168%
(1+ 0.06/12)^12 -1
Required compounding frequency per year	4
Req period effective rate	1.5075%
(1+ 0.06167781)^1/4 -1
Required APR	6.03005%
0.01507512*4

	Particulars	Amount
	Qrly payment	1,035
	× FVAF 9yrs	47.34286
a	Value year 9	48,999.86
	Less: invesemnt	-37,260.00
b	Interest earned	11,739.86

c

Particulars	Amount
Given APR	5.00%
Given compounding frequency per year	12
Effective annual rate	5.116%
(1+ 0.05/12)^12 -1
Required compounding frequency per year	4
Req period effective rate	1.2552%
(1+ 0.0511619)^1/4 -1
Required APR	5.02086%
0.01255216*4

Value of fund	48,999.86
× PMT factor	0.038138
Size of withdrawal	1,868.77