In this scenario, you will look at the impact of interest rates on your savings.
ID: 2780847 • Letter: I
Question
In this scenario, you will look at the impact of interest rates on your savings. Suppose that you have $2,000 of savings. You don’t anticipate needing to dip into these funds in the next five years. Based on the information provided in the table, calculate the future value (FV) of $2,000 at the end of years 1 and 5 if it were to be completely invested in each of the different cash management products.
Product
Annual Interest Rate
Restrictions/Fees on Product Usage
FV at end of Year 1
FV at end of Year 5
Checking Account
0.00%
No minimum
No limit on withdrawals
Answer:
Inputs:
Interest Rate per Time Period:
Number of Time Periods:
Present Value:
Answer:
Inputs:
Interest Rate per Time Period:
Number of Time Periods:
Present Value:
Savings Account
1.50%
No minimum
Limited to 3 withdrawals per month
Answer:
Inputs:
Interest Rate per Time Period:
Number of Time Periods:
Present Value:
Answer:
Inputs:
Interest Rate per Time Period:
Number of Time Periods:
Present Value:
Certificate of Deposit (CD)
5%
$500 minimum balance
Early withdrawal penalty: 180 days of interest plus $25
Answer:
Inputs:
Interest Rate per Time Period:
Number of Time Periods:
Present Value:
Answer:
Inputs:
Interest Rate per Time Period:
Number of Time Periods:
Present Value:
Product
Annual Interest Rate
Restrictions/Fees on Product Usage
FV at end of Year 1
FV at end of Year 5
Checking Account
0.00%
No minimum
No limit on withdrawals
Answer:
Inputs:
Interest Rate per Time Period:
Number of Time Periods:
Present Value:
Answer:
Inputs:
Interest Rate per Time Period:
Number of Time Periods:
Present Value:
Savings Account
1.50%
No minimum
Limited to 3 withdrawals per month
Answer:
Inputs:
Interest Rate per Time Period:
Number of Time Periods:
Present Value:
Answer:
Inputs:
Interest Rate per Time Period:
Number of Time Periods:
Present Value:
Certificate of Deposit (CD)
5%
$500 minimum balance
Early withdrawal penalty: 180 days of interest plus $25
Answer:
Inputs:
Interest Rate per Time Period:
Number of Time Periods:
Present Value:
Answer:
Inputs:
Interest Rate per Time Period:
Number of Time Periods:
Present Value:
Explanation / Answer
Formula for future value is
FV = PV(1+r)^n
Statement showing Future value
Product Rate ('R) N= no of period FV Checking Amount 0.00% 1 FV= 2000(1+0)^1 2000 Checking Amount 0.00% 5 FV= 2000(1+0)^5 2000 Savings account 1.50% 1 FV= 2000(1+0.015)^1=2000(1.015) 2030 Savings account 1.50% 5 FV= 2000(1+0.015)^5
2000(1.07728) 2155 COD 5% 1 FV= 2000(1+0.05)^1
=2000(1.05) 2100 COD 5% 5 FV= 2000(1+0.05)^5
=2000(1.2762) 2552
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