Question

Recently, More money 4U offered an annuity that pays 4.8% compounded monthly. If 1,873 is deposited into this annuity every month, how much is in the account after 12 years? How much of this is interest?

(round to the nearest dollar)

Answer 1

In the given question, the payments are made every month so a 'period' is defined as 'one month'. We will assume that the annuties are of the ordinary type i.e. payments are made at the end of every month. We are required to find out the future value of the annuity (FVA). The formula for the same is:

where A = amount of annuity payable every period = $1,873

i = effective rate of interest = 4.8% or 0.048

m = total number of periods = 12 X 12 = 144

Putting the values in the formula we get,

= $33,328,293 (rounded to the nearest dollar)

Interest = FVA - Total annuties paid

= 33,328,293 - (1,873 X 144)

= $33,058,581