3) The formula for calculating the amount of money returned for deposit money into a bank account or CD (Cert

ash - 2007-01-26 19:33:52 - Investing

3) The formula for calculating the amount of money returned for deposit money into a bank account or CD (Certificate of Deposit) is given by the following: A is the amount of returned P is the principal amount deposited r is the annual interest rate (expressed as a decimal) n is the compound period t is the number of years Carry all calculations to 6 decimals on all assignments then round the answer to the nearest cent. Suppose you deposit $20,000 for 3 years at a rate of 8%. a) Calculate the return (A) if the bank compounds annually (n = 1). Answer: Show work in this space. Use ^ to indicate the power. b) Calculate the return (A) if the bank compounds quarterly (n = 4). Round your answer to the hundredth's place. Answer: Show work in this space . c) Calculate the return (A) if the bank compounds monthly (n = 12). Round your answer to the hundredth's place. Answer: Show work in this space. d) Calculate the return (A) if the bank compounds daily (n = 365). Round your answer to the hundredth's place. Answer: Show work in this space. e) What observation can you make about the size of increase in your return as your compounding increases more frequently? Answer: f) If a bank compounds continuous, then the formula becomes simpler, that is where e is a constant and equals approximately 2.7183. Calculate A with continuous compounding. Round your answer to the hundredth's place. Answer: Show work in this space g) Now suppose, instead of knowing t, we know that the bank returned to us $25,000 with the bank compounding continuously. Using logarithms, find how long we left the money in the bank (find t). Round your answer to the hundredth's place. Answer: Show work in this space h) A commonly asked question is, “How long will it take to double my money?” At 8% interest rate and continuous compounding, what is the answer? Round your answer to the hundredth's place. Answer: Show work in this space.

Best Answer:

Divide the interest rate into 72. This is the number of years it will take to double your money. At 2%, you will need 36 years. At 24%, you will need only three. 72÷8=9. Nine years at 8% and you will have twice as much. That would be in an IRA or a Roth IRA, where interest income is left to accumulate. With the IRA you get a deduction. With the Roth, all money earned by the money is entirely without tax consequences. 72/ i = number of years to double. 72/number of years the money is in the account= interest rate.

Answers:

Divide the interest rate into 72. This is the number of years it will take to double your money. At 2%, you will need 36 years. At 24%, you will need only three. 72÷8=9. Nine years at 8% and you will have twice as much. That would be in an IRA or a Roth IRA, where interest income is left to accumulate. With the IRA you get a deduction. With the Roth, all money earned by the money is entirely without tax consequences. 72/ i = number of years to double. 72/number of years the money is in the account= interest rate.