Question

An individual contributes $250 per month to a retirement account. The account earns interest at a nominal annual interest rate of 6%, with interest being credited monthly. What is the value of the account after 10 years?

a. $68,976

b. $44,567

c. $40,969.83

d. $49,164

Answer 1

Formula :

Future value of a periodic payment is given by :

FV = (P/r)((1 + r)ⁿ - 1)

where FV = Future value or amount after n years that we have to calculate, P = Periodic payment = monthly payment = 250, r = interest rate of a period(month) = (6/12)% = 0.5% = 0.005 and n -= number of periods = number of months = 12*10 = 120

Thus using above formula :

FV = (250/0.005)((1 + 0.005)¹²⁰ - 1)

=> FV = 40969.83

Thus, after 10 years in his account he will have $40969.83

Hence, the correct answer is (c) $40969.83