Assume that 1 year from now you plan to deposit $ 1,000 in a savings account tha

Question

Assume that 1 year from now you plan to deposit $ 1,000 in a savings account that pays a nominal rate of 8%. a. If the bank compounds interest annually, how much will you have in your account 4 years from now? b. What would your balance be 4 years from now if the bank used quarterly com-pounding rather than annual compounding? c. Suppose you deposited the $ 1,000 in 4 payments of $ 250 each at the end of years 1, 2, 3, and 4. how much would you have in your account at the end of year 4, based on 8% annual compounding? d. Suppose you deposited 4 equal payments in your account at the end of years 1, 2, 3, and 4. assuming an 8% interest rate, how large would each of your pay-ments have to be for you to obtain the same ending balance as you calculated in part a?

Explanation / Answer

a)1000*((1+8%)^3)=$1259.712 b)1000*((1+8%/4)^12)=$1268.242 c)250*((1+8%)^3)+250*((1+8%)^2)+250*((1+8%)^1)+250=1126.53 and d)X*((1+8%)^3)+X*((1+8%)^2)+X*((1+8%)^1)+X=1259.712;; i.eAmount to be deposited at end of each year is x=$279.556

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