Question

You're prepared to make monthly payments of $380, beginning at the end of this month, into an account that pays 6 percent interest compounded monthly.

How many payments will you have made when your account balance reaches $25,495?

Multiple Choice

• 4.96

• 63.8

• 27.71

• 52.2

• 58

Answer 1

An Annuity is a series of payments of fixed amounts and at fixed intervals.

These can be of two types:

· Ordinary Annuity – payment is made at the end of each period.

· Annuity Due – Payment is made at the beginning of each period

FV of an ordinary annuity can be calculated as:

Where C denotes the fixed annuity amount or 380

r denotes the rate of interest, 6% annually or 0.005 compunded monthly

n denotes the number of periods

Substituting the above values, calculate n:

For the balance to reach $ 25,495, 58 monthly payments are required.

Hence, choose Option 5.