Question

Stewart is saving for a holiday. He deposits a fixed amount every quarter in a bank account with an EAR of 8%. If this account pays interest every month then how much should he save from each quarterly paycheck in order to have $25,000 in the account in five years' time? show formula

Answer 1

Solution

Since EAR is 8%, therefore, APR=m*[(1+EAR)^(1/M)-1]

m= number of compounding in a year

=12*((1+.08)^(1/12)-1)

=0.077208

Now we have Future value of the annuity =25000

since payment made once in a quarter, therefore, the number of periods= 4

FV of annuity= Annuity*(((1+r/4)^(n*4)-1)/(r/4)

25000=Annuity*(((1+.077208/4)^(5*4)-1)/(.077208/4)

Annuity=25000/24.129208

=1036.089

Thus he must save 1036.089 every quarter

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