Question

Leslie​ Mosallam, who recently sold her​ Porsche, placed ​$8,600 in a savings account paying annual compound interest of 4 percent.

a. Calculate the amount of money that will accumulate if Leslie leaves the money in the bank for 3​, 7​, and 17 ​year(s).

b. Suppose Leslie moves her money into an account that pays 6 percent or one that pays 8 percent. Rework part ​(a​) using 6 percent and 8 percent.

c. What conclusions can you draw about the relationship between interest​ rates, time, and future sums from the calculations you just​ did?

Answer 1

a.

PV = FV/(1+r)^n

PV - Present value

FV - Future value

r - Interest rate

n - no. of periods

n = 3

FV = 8600*(1+0.04)^3 = $9673.83

n = 7

FV = 8600*(1+0.04)^7 = $11317.01

n = 17

FV = 8600*(1+0.04)^17 = $16751.94

b.

r = 6%

n = 3

FV = 8600*(1+0.06)^3 = $10242.74

n = 7

FV = 8600*(1+0.06)^7 = $12931.22

n = 17

FV = 8600*(1+0.06)^17 = $23157.85

r = 8%

FV = 8600*(1+0.08)^3 = $10833.52

n = 7

FV = 8600*(1+0.08)^7 = $14738.89

n = 17

FV = 8600*(1+0.08)^17 = $31820.16

c.

As the interest rates increase, the future sums increases.

As the time increases, the future sums increases.