Question
In: Finance
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 agoRelated Solutions
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