Question

In Chapter 1 of the text we looked at calculating a monthly payment for a loan. A related formula is to calculate the amount accruing when regular payments are made into an interest bearing account - often called the Savings Plan formula.

(A is the accrued amount after t years of making regular payments, PMT, into an account at interest rate, r%, compounded n times each year.)

        A(t) = PMT·((1 + r/N)^N·t - 1)/(r/N)

                 = PMT*((1 + r/N)^(N*t) - 1)/(r/N)

The second version is essentially in the form used in Excel

Suppose you want to buy a car and have decided that you can save $100 a month. Using information from an internet source, determine the current interest rate on savings accounts and use the information to answer the following:

1. How much money will you have saved in two year’s time?
2. How much will be interest?
3. Why wouldn’t a linear model work here?

Here is one option to research accounts that does not require personal information: NerdWallet

A Microsoft Excel spreadsheet is required.

Answer 1

3. Linear model did not work here because here interest is earned on previous earned interest also apart from principal. Therefore in second month interest is earned on first month interest, in third month it is earned on first and second month Interest also and so on. So amount which we saved become power function rather than linear model. Linear model work if there is no compouding interest involved i.e. if simple interest calculation need to done.