Question

21. Suppose you save $8,000 in a saving account for two years. For the first year the interest rate is 9.9% compounded monthly, while during the second year the interest rate is 11.6% compounded monthly. What is the balance in your savings account after the second year?

(a) $9,743.78 (b) $9,909.35 (c) $9,811.87 (d) $17,807.91

Answer #1

**(b) $9,909.35**

Step-1:Future value at the end of year 1 |
||||||||||

A | = | P*(1+i)^n | Where, | |||||||

= | 8000*(1+0.00825)^12 | A | = | Future Value | = | ? | ||||

= | $ 8,828.94 | P | = | Present Value | = | $ 8,000.00 | ||||

i | = | Interest rate | = | 9.9%/12 | = | 0.00825 | ||||

n | = | Time | = | 1*12 | = | 12 | ||||

Step-2:Future value at the end of year 2 |
||||||||||

A | = | P*(1+i)^n | Where, | |||||||

= | 8828.94*(1+0.0096667)^12 | A | = | Future Value | = | ? | ||||

= | $ 9,909.35 | P | = | Present Value | = | $ 8,828.94 | ||||

i | = | Interest rate | = | 11.6%/12 | = | 0.0096667 | ||||

n | = | Time | = | 1*12 | = | 12 |

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