Question

4. How much money needs to be deposited into a certificate of deposit (CD) account to be able to withdraw 50,000.00 from the account at the end of 10 years if the interest rate is 2% compounded monthly?

Answer 1

Compound interest is calculated as follows:
A = P (1 + r/n)^nt
A = annual amount = 50000
r = rate of interest = 2% = 0.02
t = years = 10 years
n = number of times compounded = monthly = 12
P = Principal amount (to be calculated)

50000 = P ( 1+ 0.02/12) ^12*10
or, 50000 = P (1+0.0016)¹²⁰
or, 50000 = P * 1.2211994387
or, P = 50000 / 1.2211994387= 40943.35

Hence 40,943.35 is to be deposited to get a return of 50000 compounded annually at 2% interest after 10 years.