You are hoping to buy a house in the future and recently received an inheritance

Question

                    You are hoping to buy a house in the future and recently received an inheritance of $22,000.00. You intend to use your inheritance as a down                     payment on you house.                 

                    a) Ia) If you put your inheritance in an account that earns 7 percent interest compounded                     annually, how many years will it be before your inheritance grows to $35,000?                 

                    b) Ib) If you let your money grow for 10.5 years at 7 percent, how much will you have?                 

                    c) c) How long will it take your money to grow to $35,000.00 if you                     move into an account that pays 3 percent compounded annually? How long will it take your money to grow $35,000.00 if you move it into an account that pays 11                     percent?                 

                    d) D) What does all this tell you about the relationship among                     interest rates, time, and future sums?                 

Explanation / Answer

22000*(1.07)^n = 35000

nlog(1.07) = log(35000/22000)

n = 6.86

22000*(1.07)^10.5 = 44766.42

22000*(1.03)^n = 35000

nlog(1.03) = log(35000/22000)

n = 15.71

22000*(1.03)^n = 35000

nlog(1.11) = log(35000/22000)

n = 4.45

interest rate increases, time required to achieve the same future amount decreases i.e. if the future value is constant, rate of interest and the no. of periods is inversely related.

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