Kate is thinking about investing $60 000 for 4 years. She deposits her money into an account which earns interest paid semiannually at a rate of 7% p.a. After 2½ years, the interest rate drops to 5.6% p.a. and stays constant for the remainder of the investment period.

Question

Kate is thinking about investing $60 000 for 4 years. She deposits her money into an account which earns interest paid semiannually at a rate of 7% p.a. After 2½ years, the interest rate drops to 5.6% p.a. and stays constant for the remainder of the investment period.
Use Excel or another suitable method to solve the problems below.
(a) How much interest was accrued in the second year of the investment?

(b) What will be the balance of Kate’s account at the end of the fourth year?

Henry · Answer

P = Po(1+r)^n.

b. r = (7%/2) / 100% = 0.035 = Semi-annual
% rate expressed as a decimal.
n = 2Comp./yr * 2.5yrs = 5 Compounding
periods.

P = 60,000(1.035)^5 = $71,261.18 = Bal.
after 2.5 yrs.

P = 71,261.18(1.028)^3 = $77,367.40 =
Bal. after 4 yrs.