Question

1- Twelve years ago, you placed $1000 in an account that earns a 6% annual return. Assuming that you made no withdrawals, how much money would you have in the account today? Round your final answer to two decimals. Do not use dollar signs or words when entering your response.

2- A savings bond will be worth $2000 when it matures in 15 years, but you need cash today. If the current interest rate is 5%, what is your bond worth if you sell it today? Round your final answer to two decimals. Do not use the dollar sign or words when entering your response.

Answer 1

1) Principal = $1000

interest rate = 6%

No of periods = 12 years

Value of the account today (Future value) = Principal (Present value) * (1 + interest rate)^{no of periods}

Value of the account today = $1000 * (1 + 6%)¹²

Value of the account today = $2012.20

2) Face value of the bond = $2000

Time to maturity = 15 years

Current interest rate = 5%

Bond price = Face value / (1 + interest rate)^{Time to maturity}

Bond price = $2000 / (1 + 5%)¹⁵

Bond price = $962.03

The bond's worth if you sell it today = $962.03