Question

An investment of $41 700 is accumulated at 7.24% compounded quarterly for three and one-half years. At that time the interest rate is changed to 6.12% compounded monthly. How much is the investment worth two years after the change in interest rate?

Answer 1

Step 1: Value of the Investment (PV) : $ 41700; Rate of Interest (RATE) = 7.24%; Nature: Quarterly compounding

Period (NPER)= three and one-half years = 14 quarters

using Excel, Future Value at the end of Step 1 period: FV(RATE/4,NPER,,-PV,0) = $ 53604.61

Step2: Using the Step 1 FV as the Present Value (PV) and Rate of Interest (Rate) = 6.12%; Nature: Monthly compounding and Period (NPER) = 2 years = 24 months

using Excel, Future Value at the end of Step 1 period: FV(RATE/12,NPER,,-PV,0) = $ 60565.42

Answer: The investment worth two years after the change in interest rate is $ 60565.42