Question

Suppose you were hired on January 1, 2015 and started depositing $400 at the end of each month, with the first deposit on January 31, 2015, in a pension fund that pays interest of 6% per year compounded monthly on the minimum monthly balance and credited at the end of each month.

a) How much money was in the pension fund on March 1, 2015?

(b) How much money was in the pension fund on April 1, 2015?

(c) How much money will be in the pension fund on January 1, 2045?

(d) What is the total amount of interest earned in this pension fund during these 30 years?

Answer 1

Answer a)

Future Value =

where r is the rate of Return for compounding period = 6% /12 = 0.5%

n is the no of compounding period 2 months

=

= 400 * 2.005

= 802

Answer b)

Future Value =

where r is the rate of Return for compounding period = 6% /12 = 0.5%

n is the no of compounding period 3 months

=

= 400 * 3.015025

= 1206.01

Answer b)

Future Value =

where r is the rate of Return for compounding period = 6% /12 = 0.5%

n is the no of compounding period 3 years * 12 months = 360 months

=

= 400 * (6.02257521226 - 1) / 0.005

= 400 * 1004.51504245

= $ 401,806.01698

Answer d)

Total Interest Earned = 401,806.01698 - (400 * 360) = 257,806.01698

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