Question

You have deposited $10,000 in a bank earning interest at 7% p.a. compounded quarterly for four years and five months. At that time, the interest rate changes to 6% p.a. compounded monthly. What is the value of the deposit three years after the change in the rate of interest?

Answer 1

Step 1:

Present Value (PV) = $ 10000, RATE = 7% Compounding quarterly; Period (NPER) = 4 years 5 months = 4.417 years

Future Value at the end of period using EXCEL Formula:

FV(RATE%/4,(NPER*4),PMT,-PV,0) = FV(7%/4,(4.417*4),,-10000,0) = $ 13586.83

Step 2:

Present Value (PV) = $ 13586.83, RATE = 6% Compounding monthly; Period (NPER) = 3 years

Future Value at the end of period using EXCEL Formula:

FV(RATE%/12,(NPER*12),PMT,-PV,0) = FV(6%/12,(3*12),,-13586.83,0) = $ 16259.09

Answer: Value at the end of year 3 of change of rate = $ 16259.09