Find the future value of a $195,000 Certificate of Deposit that pays compounded

Question

Find the future value of a $195,000 Certificate of Deposit that pays compounded interest every three months at the rate of 8% per year. The CD has a term of 7 years.

a) Calculate the FV (Future Value) using the “Future Value or Compound Amount of $1.00” table in your textbook. Reminder: To use Table 13-1, you need to calculate the Number of Periods and the Interest Rate per Period.

b) Calculate the FV (Future Value) using the formula: FV = P(1 + R)N Reminder: Always show work. You can do this by stating the values that you are substituting into the formula.

c) How much interest was earned on the investment? Use either the result from Part 2a or Part 2b, since they are slightly different for your calculation.

Explanation / Answer

Ans:

a)Interest is compounded every 3 months i.e. 4 times a year

So,4 periods per year for 7 years is 4*7=28 periods

Also,8%/4=2% per quarter

Interest rate per period and and 28 period corresponds to Future value of 1.74102

Future value*Certififcate of Deposit=1.74102*195000=339498.90

Future value is 339498.90

So,interest earned=339498.90-195000=1,44,498.90

b)FV=P(1+R)N

FV=195000*(1+0.02)28

FV=195000*(1.02)28

FV=195000*1.74102=339498.90

c)interest earned=339498.9-195000=1,44,498.90

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