Question

19. I have an opportunity to invest $20,000 today at a compound interest rate of 6.4% p.a compounded monthly. I intend to withdraw the total account balance when it reaches $106,000. How long do I need to hold the investment? Answer in months to two decimal places.  

20.

Greg makes an investment which is expected to pay 4% p.a. interest, compounded annually. He invests $4,000 today. The value of the investment at the end of nine years, if you make no withdrawals, is closest to:

Select one:

A. $5,440.00

B. $5,693.25

C. $5,723.08

D. $16,415.73

Answer 1

19. The number of months it takes can be calculated using NPER function in EXCEL

=NPER(rate,pmt,pv,fv,type)

Here, the interest is compounding monthly.

rate=6.4%/12=0.5333%

pmt=0

pv=20000

fv=106000

=NPER(0.5333%,0,-20000,106000,0)

NPER=313.53

The number of months it takes=313.53

20. The formula for the future value=Present value*(1+interest rate)^n

present value=$4000

interest rate=4%

n=number of periods=9

Future value=$4000*((1+4%)^9)=$4000*1.423312=$5693.25

Option B is correct