What values do I enter for N, PMT, i/y, FV and PV on a finance calculator to solve for the question below.

Suppose you deposit $1,095.00 into an account 5.00 years from today. Exactly 20.00 years from today the account is worth $1,413.00. What was the account's interest rate?

1 answer

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:

  • 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.

  • 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.

  • PMT (payment per period): Since there are no additional payments made to the account, PMT = 0.

  • FV (future value): This is the total amount in the account 20 years from now, which is $1,413. Therefore, FV = 1,413.

  • 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.