Question

Question 4

A finance company offered an annuity with 3.5%interest rate compounded monthly for the first five years and additional 1% interest rate compounded monthly thereafter. Given Henry decided to deposit RM500 every month for 8 years, find:

1. The total amount he would receive at the end of this investment term.
2. The total interest earned.

Answer 1

First we will calculate the future value of the deposits after the first five years.

Using a financial calculator

Input: PMt =-500

N = 5*12 = 60

I/Y = 3.5/12

Solve for Fv as $32,733.06

This amount is not the present value at the beginning of year 6

Now we will calculate the future value of the deposits at the end of year 8

Using a financial calculator

Input: PMt =-500

PV = -32733.06

N = 3*12 = 36

I/Y = 3.5/12

Solve for FV as 55,301.26

Hence the total amount at the end of the period = $55,301.26

Total interest earned= total amount at the end of the period-total deposits

= $55,301.26 - 500*(12*8)

=7301.26