Question

1. You plan to make five deposits of $1,000 each, one every 6 months, with the first payment being made in 6 months. You will then make no more deposits. If the bank pays 7% nominal interest, compounded semiannually, how much will be in your account after 3 years? Do not round intermediate calculations. Round your answer to the nearest cent.  

2. One year from today you must make a payment of $6,000. To prepare for this payment, you plan to make two equal quarterly deposits (at the end of Quarters 1 and 2) in a bank that pays 7% nominal interest compounded quarterly. How large must each of the two payments be? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

a) Semi-annual interest rate = 7%/2 = 3.5%

b) First, calculate the PV of the 2 cash flows and then bring that forward one year to equal $6,000

Quarterly rate = 7%/4 = 0.0175

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