Question

Your Aunt gives you $5,000 today. You want to put it away and use it as a down payment on a new car in 2 years. You put it in a mutual fund investment with an online discount broker, earning 8% per year.
a) (4 points) What will you have at the end of 2 years? SHOW ALL WORK FOR FULL CREDIT using the TI BAII Plus Calculator.
b) (2 points) What is the total interest in $ earned on this investment over the 2 years? Show work.
c) (4 points) If the investment account compounds interest quarterly, what will you have at the end of 2 years? SHOW ALL WORK FOR FULL CREDIT using the TI BAII Plus Calculator.

Answer 1

Amount to be invested = $5,000

Rate = 8%

Question a)

Note: Assuming simple interest as nothing is mentioned.

Interest earned in year 1 = 5000 x 8% = $400

Interest earned in Year 2 = 5000 x 8% = $400

So the amount at the end of year 2 = 5000 + 400 + 400 = $5,800

Question b)

Total interest earned in two years = 400 + 400 =$800

Question c)

Formula for computing compunded amount at the end of two years is as follows:

Amount = Principle (1+r)ⁿ

r = 8% annually i.e., 2% quarterly

n = number of quarters = 8 quarters

Amount = 5000 (1.02)⁸ = 5000 x 1.1716 = $5,858