Question
Jim wants to deposit money in an account to save for a new stereo system in two years. He wants to have $4,000 available at the time. The following rates are available to him:
6.2% simple interest
6.1% compounded annually
5.58% compounded semiannually
5.75% compounded quarterly
Which account(s) should he choose if he wants to invest the smallest amount of money now? I was thinking the 5.57% compunded quarterly or 5.58% compounded semiannually
How much money must he invest to accumulate $4,000 in two years'time?
6.2% simple interest
6.1% compounded annually
5.58% compounded semiannually
5.75% compounded quarterly
Which account(s) should he choose if he wants to invest the smallest amount of money now? I was thinking the 5.57% compunded quarterly or 5.58% compounded semiannually
How much money must he invest to accumulate $4,000 in two years'time?
Answers
jim
Imagine you start with $1 (or $1,000 if you prefer).
How much would you have at the end of two years, under each of the schemes?
For example, under the second, starting with $1, you would have
$1 * 1.06 = $1.061 at the end of the first year
$1.061 * 1.06 = $1.12466 at the end of the second year
So to end with $4000, you'd have to start with $4000 / 1.12466.
Do the same for the others, and you have your answer.
(And yes, it's one of those two.)
How much would you have at the end of two years, under each of the schemes?
For example, under the second, starting with $1, you would have
$1 * 1.06 = $1.061 at the end of the first year
$1.061 * 1.06 = $1.12466 at the end of the second year
So to end with $4000, you'd have to start with $4000 / 1.12466.
Do the same for the others, and you have your answer.
(And yes, it's one of those two.)