Question

You are a student in a Masters degree program and you want to save money to pay your final term of study since your benefits will not cover those final term expenses. You intend to take on a holiday side position (over the next two years) to set some money aside for your final full-term and graduation expenses.

You expect to be able to save an extra $1,500 at the end of the holiday season at the end of the first year; $1,850 at the end of the second year; and $1,000 at the time of your final registration.

Based on these assumptions, how much money will you have available to pay your final full-term and graduation expenses if interest rates are 5.25%?

1. First draw your time line for the period.

2. Using your calculator or the formula, calculate the values for the first and second periods.

3. Then add the values together (1st, 2nd, and final value) to determine the total cash available for term and graduation expenses.

Answer 1

1. Years 0 1 2 3

$0 $1,500 $1,850 $1,000

The above amounts in the timeline will be saved at the end of the year.

2. $1,500 saved at the end of year 1 will earn interest for 2 years i.e. for year 2 and year 3. $1,850 saved at the end of year 2 will earn interest for 1 year i.e. for year 3.

value for the first period = amount saved*(1+interest rate)^{no. of years} = $1,500*(1+0.525)² = $1,500*1.0525² = $1,500*1.10775625‬ = $1,661.63

value for the second period = amount saved*(1+interest rate)^{no. of years} = $1,850*(1+0.525)¹ = $1,850*1.0525¹ = $1,947.13

3. Total cash available = $1,661.63 + $1,947.13 + $1,000 = $4,608.76‬

$1,000 will not earn any interest because it is saved at the end of year 3.