Congratulations on your bonus! You've been doing such a good job at work, you have been...

Congratulations on your bonus! You've been doing such a good job at work, you have been given $5,000 bonus. Instead of buying something today, you decide to save it. You put it in an investment account that earns 8% interest per year with annual compounding. In ten years, you cash out the account. How much will you have in ten years?

are you trying to find a PV or FV?
show your calculations using the formula
show your calculations using the keystrokes for your financial calculator (state which financial calculator you are using)
what would your answer be if compounding was monthly and why is there a difference?

Solutions

Expert Solution

How much will you have in ten years?

Show your calculations using the keystrokes for your financial calculator (state which financial calculator you are using)

Using a financial calculator (Texas Instruments BA-2 plus)

PV = -5000

PMT = 0

N = 10

I/Y = 8

cpt FV, we get FV = 10794.62

Hence, after 10 years $10794.62 is accumulated

Are you trying to find a PV or FV?

Future value (FV) since we want to compount the savings to a future value

Show your calculations using the formula

Future value = Initial value*(1+Interest rate)^(Year)

Future value = 5000*(1.08^10) = $10794.62

What would your answer be if compounding was monthly and why is there a difference?

If the compounding is monthly, then

Future value = 5000*(1+ 0.08/12)^(12*10) = $11098.20

There is a difference because in monthly compounding, the effective rate of interest is higher than the annual compounding. Hence, the future value if higher in monthly compounding.

jeff jeffy answered 1 year ago

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