You deposit $100,000 into a Money Market account (savings account). If the accou

Question

You deposit $100,000 into a Money Market account (savings account). If the account pays 6% per year compounded annually, how much will you have in your account:

After 1 year?

After 2 years?

After 3 years?

After 5 years?

After 10 years?

2-You would like to buy a racehorse next year. You expect the horse will cost $10,000 one year from now. How much would have to deposit into the bank today (assuming the savings account would pay 5% interest) in order to buy the racehorse next year?

b) What if you were to wait 5 years to buy the racehorse and the horse is still expected to cost only $10,000 in 5 years.

Explanation / Answer

Ans 1) Future value in account = amount * (1 + interst rate)^n

after 1 year amount = 100000 * 1.06^1 = $106000

after 2 year amount = 100000 * 1.06^2 = $112360

after 3 year amount = 100000 * 1.06^3 = $119101.6

after 5 year amount = 100000 * 1.06^5 = $133822.56

after 10 year amount = 100000 * 1.06^10 = $179084.77

Ans 2 a) Present value of deposit = Future value/(1+r)^n

= 10000/(1.05)^1

= $9523.81

Ans b) Present value of deposit = 1000/(1.05)^5

= $7835.26

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.