a) Jennifer invests $80,000 in an account which pays 7% compounded annually for

Question

a) Jennifer invests $80,000 in an account which pays 7% compounded annually for 3 years. What is her total investment return at the end of the 3 years? (3 marks)

b) John has $5000 to invest. The bank will pay John 6% compounded monthly on his money. How much interest will John earn after 5 years? (4 marks)

c) Roslyn’s account pays her 5% compounded quarterly. If she invests $8250, how much interest is she paid over 2.5 years? (4 marks)

d) Margaret would like to save up for a snowboard that costs $520. How much would she have to invest now in an investment account earning 6.5% compounded semiannually, if she would like to purchase the snowboard 1 year from now?

Explanation / Answer

Since interest is paid compounded therefore interest will be calcuated on cummulative value

A) Toal return = Pricipal + Interest

Interest yr1 = 80000*7% = $5600

yr 2 = 85600*7% = $5992

yr3 = 91592*7% = $6411

Total return = 80000+5600+5992+6411 = $98003

B) Formula for compounded interet rate =  P [(1 + i)n – 1]

here i = 6%/60times = .1%

Interest = 80000[(1+.1)60-1]

C) here i = 5%/10= .5%

Interest = 80000[(1+.5)10-1]

D) Margret should invest Present value of $520.. but we dont have rate of interest so calculation can not be done.

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