Respuesta :
Answer:
a. $1,628.9
b. Because the interest is compounding; which means the bank also pay interest for interest incurred yearly.
Explanation:
Present Value (PV): $1000
Rate: 5%
Tenor: 10 years
a. Future value of this CD = PV*(1+rate)^tenor
= $1000*(1+5%)^10
= $1,628.9
b. The total interest earned = FV - PV = $1,628.9 - $1000 = $628.9
The owner of this CD will receive total interest $628.9 at the maturity date of CD after 10 years. But if he received interest annually, total paid to him is $500 only.
The interest in FV formula is compounding; which means the bank also pay interest for interest incurred yearly.
Answer:
a. Future value is $1628.89
b. it earns interest on interest in 10 years as the investor never withdraws the interest.
explanation:
a. We have been given a perpetuity where an initial investment of $1000 earns an interest of 5% indefinitely but we are now told to calculate the future value of this CD in 10 years which will be calculated using the future value formula which is [tex]Fv = Pv(1+i)^n[/tex]
Fv depicts the future value of the investment
Pv is the present value of the CD which is $1000 initial investment
i is the interest rate earned on the CD which is 5%
n is the number of years of which the CD( cash derivative) is saved for which in this case is 10 years.
Therefore if we substitute these values on the above mentioned formula and solve for Fv :
Fv = $1000(1+5%)^10
Fv = $1628.89 (correct to two decimal places)
this will be what the investment is worth after 10 years.
b. As calculated above we know that the interest after 10 years is $1628.89-$1000= $628.89 which is more than $500 because it is compound interest and not simple interest as in 10 years there will not be a withdrawal of the interest made each year therefore interest is reinvested and earns its own interest as the principal amount now.
Fv = 1000(1+ 0.05)^10
