Question

Sheela has set up a savings account to pay for a dream vacation. She will deposit $780 at the beginning of each six-month period for seven years into a savings account. The interest rate on the account is 4.2% compounded semi-annually.

a. What will be the value of the account at the end of seven years?

b. How much interest will the account have earned over the seven years?

Answer 1

- Periodic Deposit at the beginning of each 6-month for 7 years is $780

a). Calculating the Future Value at the end of Year 7:-

Where, C= Periodic Payments = $780

r = Periodic Interest rate = 4.2%/2 = 2.1%

n= no of periods = 7 years*2 = 14

Future Value = $12,543.33

So, the value of the account at the end of seven years is $12,543.33

b). Total interest earned over 7 years = Future Value - (No of payments*Periodic Payments)

Total interest earned over 7 years = $12,543.33 - (14*$780)

Total interest earned over 7 years = $1623.33

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