1. Mr. Sparky puts away $250 from each monthly paycheck into an account that ret
ID: 2678220 • Letter: 1
Question
1. Mr. Sparky puts away $250 from each monthly paycheck into an account that returns 7.89%annual interest compounded monthly for his retirement.
a. How much will Mr. Sparky have saved up in his account if he makes these deposits for
20 years?
b. When he retires, he plans to live on the interest he earns each month. How much in
interest will he earn each month? (assume he can get the same interest rate as in part a)
2. LaDonna invested $1,200 each year in an IRA for 12 years in an account that earned 5%
compounded annually. At the end of 12 years, she stopped making payments to the account,
but continued to invest her accumulated amount at 5% compounded annually for the next 11
years.
a. What was the value of the IRA at the end of 12 years?
b. What was the value of the investment at the end of the next 11 years?
c. How much interest did she earn?
Explanation / Answer
Interest is 7.89/12 Fv=250(1+ 7.89/12)^(20^12) Fv=146,213.41 961.35 per month. (146,213.41*.0789)/12 Well I know the hard way to do this ... but I am sure there is a formula that would bang this out as soon as you plug in the numbers .... for the first 12 years you will have to add in an additional 1200$ each year ... when you get to year 12 you can use a compound interest formula for the remaining 11 years 1200 * 1.05 = year one (year one + 1200) * 1.05 = year two (year two + 1200) * 1.05 = year three (year three + 1200) * 1.05 = year four and so forth until you get to year twelve then the formula changes to your basic M = P( 1 + i )n for the remaining 11 years M is the final amount including the principal. P is the principal amount. which would be your total after the first 12 years (because he/she kept adding more each year in the amount of 1200) i is the rate of interest per year. which is 5% n is the number of years invested. which would be 11 because we are only using this formula for the second half of this problem when she stopped adding in more and simply let it grow off the compound interest alone so for a) go through it line by line till you get the twelve year total for b) start with your answer from a) M = (twelve year total) * 1.05^11Related Questions
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