Suppose that you have a money market certificate earning an annual rate of inter

Question

Suppose that you have a money market certificate earning an annual rate of interest, which varies over time as follows: Year k 2 3 4 5 696 4% 3% 3% 596 If you invest $10,000 in this certificate at the beginning of year one and do not add or withdraw any money for five years, what is the value of the certificate at the end of the fifth year? Click the icon to view the interest and annuity table for discrete compounding when 1-3% per year. Click the icon to view the interest and annuity table for discrete compounding when 4% per year. Click the icon to view the interest and annuity table for discrete compounding when 596 per year.

Explanation / Answer

Value at the end of 1st year = 10,000(F/P, 6%, 1) = 10,000(1.060) = 10,600

Value at the end of 2nd year = 10,600(F/P, 4%, 1) = 10,600(1.040) = 11,024

Value at the end of 3rd year = 11,024(F/P, 3%, 1) = 11,024(1.030) = 11,354.72

Value at the end of 4th year = 11,354.72(F/P, 3%, 1) = 11,354.72(1.030) = 11,695.36

Value at the end of 5th year = 11,695.36(F/P, 5%, 1) = 11,695.36(1.050) = 12,280.13

Thus, the value of the certificate at the end of fifth year is $12,280.13

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