In: Finance
Starting on October 1, 2002, annual deposits of $145
are made into an account paying interest at a rate of 7.8%
compounded monthly. How much is in the account immediately after
the deposit on October 1, 2031? Please show all steps and be very
clear thankyou
Since the payments are annual, we need to first convert the interest rate to effective annual rate.
There are 12 months in a year.
effective annual rate = (1 + interest rate/number of periods)^periods - 1
effective annual rate = (1 + 0.078/12)^12 - 1
effective annual rate = (1 + 0.0065)^12 - 1
effective annual rate = 1.08085 - 1
effective annual rate = 0.08085 or 8.085%
Number of periods = 2031 - 2002 + 1 = 30
Future value = Annuity * [(1 + rate)^periods - 1] / rate
Future value = 145 * [(1 + 0.08085)^30 - 1] / 0.08085
Future value = 145 * [10.30298 - 1] / 0.08085
Future value = 145 * 115.06467
Future value = $16,684.38
The account will have $16,684.38.