Fifteen years ago, you deposited $12,500 into an investment fund. Five years ago, you added an
additional $20,000 to that account. You earned 8%, compounded semi-annually, for the first ten years,
and 6.5%, compounded annually, for the last five years.
Required:
a) What is the effective annual interest rate (EAR) you would get for your investment in the first 10
years? (2 marks)
b) How much money do you have in your account today? (4 marks)
c) If you wish to have $85,000 now, how much should you have invested 15 years ago?
Answers
Step-by-step explanation:
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Fifteen years ago, you deposited $12,500 into an investment fund. Five years ago, you added an additional $20,000 to that account. You earned 8%, compounded semi-annually, for the first ten years, and 6.5%, compounded annually, for the last five years. a) What is the effective annual interest rate (EAR) you would get for your investment in the first 10 years? b) How much money do you have in your account today? c) If you wish to have $85,000 now, how much should you have invested 15 years ago?
Fifteen years ago, you deposited $12,500 into an investment fund. Five years ago, you added an additional $20,000 to that account. You earned 8%, compounded semi-annually, for the first ten years, and 6.5%, compounded annually, for the last five years. a) What is the effective annual interest rate (EAR) you would get for your investment in the first 10 years? b) How much money do you have in your account today? c) If you wish to have $85,000 now, how much should you have invested 15 years ago?
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Question
Fifteen years ago, you deposited $12,500 into an investment fund. Five years ago, you added an additional $20,000 to that account. You earned 8%, compounded semi-annually, for the first ten years, and 6.5%, compounded annually, for the last five years.
a) What is the effective annual interest rate (EAR) you would get for your investment in the first 10 years?
b) How much money do you have in your account today?
c) If you wish to have $85,000 now, how much should you have invested 15 years ago?
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Expert Answer
Step 1
Present value of the money is the worth of the money today that is expected to be received in future date at a given interest rate.
Step 2
Given Information:
Amount invested is $12,500
Interest rate 8% for first 10 years and for last five years it is 6.5%
No. of years 15
Annual deposit of $20,000 is deposited 5 years ago.
Step 3
Calculation:
(a)
Effective Annual rate for the first 10 years is computed as follows:
