Question

Your birthday is coming up and instead of other presents, your parents promised to give you $2,900 in cash. Since you have a part-time job and, thus, don’t need the cash immediately, you decide to invest the money in a bank CD that pays an annual rate of 8.20 percent, compounded quarterly, for the next two years. How much money can you expect to earn in this period of time? (If you solve this problem with algebra round intermediate calculations to 4 decimal places, in all cases round your final answer to the nearest penny.) Value of investment after 2 years $

Answer 1

Sol:

Present value (PV) = $2,900

Interest rate = 8.20%, Compounded Quarterly = 8.20%/4 = 2.05%

Period = 2 years, Quarterly = 2 x 4 = 8

To determine the amount of money can you expect to earn in this period of time we can use FV function in exel sheet:

PV	-2900
Interest rate	2.05%
Period	8
Future value	$3,411.16

Therefore the amount of money can you expect to earn in this period of time will be $3,411.16.

We can also use the following formula to determine future value:

FV= PV x (1+r)^n

FV= 2900 x (1+2.05%)^8

FV= 2900 x (1.0205)^8

FV= 2900 x 1.176262 = $3,411.16

Excel sheet working: