To find the interest rate of the account given the information provided, we should first organize the values for the financial calculator based on the given scenario.
You are depositing $1,095.00 into an account 5 years from now. The account will be worth $1,413.00 exactly 20 years from now, which means it will earn interest for 15 years after the initial deposit (from year 5 to year 20).
Here are the values you need to enter into a financial calculator:
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N (number of periods): This is the number of years the money will be invested after the deposit is made. Since you are making the deposit at year 5 and want to know what happens at year 20, the total time until the future value (FV) occurs is \(20 - 5 = 15\) years. Therefore, N = 15.
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PV (present value): This is the amount deposited today (at year 5), which is $1,095. Since this amount is an outflow (you are depositing it), PV = -1,095.
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PMT (payment per period): Since there are no additional payments made to the account, PMT = 0.
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FV (future value): This is the total amount in the account 20 years from now, which is $1,413. Therefore, FV = 1,413.
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i/y (interest rate per year): This is what we need to solve for.
To summarize, here is what you will enter into the finance calculator:
- N = 15
- PV = -1,095
- PMT = 0
- FV = 1,413
- i/y = ? (this is what you will solve for)
After entering these values, calculate the interest rate (i/y) to find out what the account's interest rate is.