Question

You are considering using Bill Pay to pay your rent, which is $800 a month due at the beginning of each month starting today. You are going to put a lump sum of money in a savings account today that will cover your rent for a year. If you earn an APR of 2.4% on the account, how much do you have to deposit into the account?

• $9,476.36
• $9,706.31
• $9,725.72
• $9,375.00
• $9,495.31

Answer 1

There would be total of 12 payments, one payment today and 11 payments in the coming month.

Lets consider this as an annuity of 11 future payments and calculate present value.

i = 2.4% / 12 = 0.02%

C = $800

Putting values in formula :

PV = $800 * [(1-(1+0.02%)^-11) / 0.02%]

PV = $800 * 10.87

PV = $8,695.31

Adding an amount of $800 for current month rent. Total deposit required would be

= $800 + $8,695.31 = $9,495.31