Question

1) Tom is planning to buy a house in five years. He is looking to invest $38,000 today in an index mutual fund that will provide him a return of 5 percent annually. How much will he have at the end of five years? (Round to nearest dollar) (SHOW WORKING PLEASE)

2) Your mother is trying to choose one of the following bank CDs to deposit $10,000. Which will have the highest future value if she plans to invest for three years? (PLEASE SHOW EACH STEP)

B) 4.25% compounded monthly

C) 4.75% compounded annually

Answer 1

1.We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

Hence

A=$38000*(1.05)^5

=$38000*1.276281563

=$48499(Approx).

2.

a.We use the formula:
A=P(1+r/1200)^12n
where
A=future value
P=present value
r=rate of interest
n=time period.

A=$10000(1+4.25/1200)^(12*3)

=$10000*1.135729017

=$11357.29(Approx).

b.We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

Hence

A=$10000*(1.0475)^3

=$10000*1.149375922

=$11493.76(Approx)

Hence 4.75% compounded annually has highest future value.