Question

Suppose for a whole month, Pam is able to invest $3000 of all that she brings...

Suppose for a whole month, Pam is able to invest $3000 of all that she brings in at an interest rate of 8% conpunded monthly. If she does this every month for 20 years, how much interest will she earn?

After Pam has been investing $3000 each month for 7 years at 8% compounded monthly, she finds an opportunity to earn 12% interest compounded monthly in a high yield account. She immediately reinvests funds to this new account and continues to make $3000 payments until the end of the 20 year term. What is the balance at this time?
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Answer #1

To find out the amount of interest earned, we have to calculate the future value of the deposits using the future value of annuity equation.

Future value of the deposits in 20 years =  $ 1,767,061.25

Amount of interest earned = $ 1,767,061.25 - $ 3000 240 months

Amount of interest earned =  $ 1,047,061.25

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Value of the monthly deposits at the end of 7 years is first calculated.

Future value of reinvestment into new account is calculated as follows

Balance at end of 20 years after reinvestment = $ 2,704,854.73

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