150% ALABBCoDDEE AABBCoDDE Subtle Refere. Book Title 1. A saver $1,000 in a cert

Question

150% ALABBCoDDEE AABBCoDDE Subtle Refere. Book Title 1. A saver $1,000 in a certificate of deposit after and each year pays 4 which is compounded annually the certificate meset. a) How much intere ll the saver earn if the interest is left to accumulate? the saver earn if the interest is withdrawn each b) How much in year? c) Why are the answers to (a) to (b) different? 2. At the end of each year a self employed person deposits $1,500 in a retirement a co...that earns 7 percent annually. a) How much will be in the account when the individual retires at the age of the contributions start when person years old? b) How much additional will be in the accountifthe stops making the contribution at the age 65 but defers retirement until 70? c) How much additional money will be in the account if the individual continues making the contribution but defers retirement until age 70? d compare the answers to (b) and (co. What is the effect of continuing the contributions? How much is the difference between the to answers? A saver wants $100,000 after ten years and believes that it is possible to earn an annual rate of 8 percent on invested funds. a) What amount must be invested each year to accumulate s100,000 if (1) the payments are made at the beginning of each year or (2) ifthey are made at the end of each year? b) How much must be invested annually if the expected yield is only 5 percent?

Explanation / Answer

1. (a) If interest is accumulate it would be a case of compounding interest. That is, the interest of 2nd year will be paid on the principal amount plus interest earned in first year, the same procedure will be following for calculating interest till the maturity.

Therefore, Compound Interest = Amount - Principal = p[(1 + r/100)n - 1) = 1000[(1 + 0.04)20 - 1] = 1200

(b) If interest in withdrawn each year, the interest earned in 1st year will be same that would be earned each year till maturity hence it is a case of simple interest.

Simple Interest = p*r*t/100 = 1000*4*20/100 = 800

(c) answers of a and b are different because the amount differs in each case on which interest is earned till maturity. In (a) interest is earned on principal plus interest already earned buut in (b) interest is only calculated on principal amount.

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