Given the current interest rates charged on loans and credit cards, it might be

Question

Given the current interest rates charged on loans and credit cards, it might be much better to try to save money for large purchases or expenses. Study the examples in your text (Sections 3.1 and 3.4) regarding compound interest with attention to the following formulas: A = P(1+ r/n)nt and A = Pert Not too long ago, it was possible to find a one-year Certificate of Deposit (CD) that would pay 5.50% interest compounded daily. The CD interest rates available today have changed. Create a new discussion thread, including the following information: Assume that you have x dollars saved (you choose a specific dollar amount) and would like to purchase a used car in two years. Calculate the interest earned over the two-year span on your chosen dollar amount at the 5.50% interest rate, compounded daily, for a one year CD. Show your work. Calculate how much you will have saved with this account in two years. Show your work. Investigate bank interest rates available in your area for a one year CD. Calculate how much money you will have in two years if the interest is compounded monthly or continuously. Show your work. How did the change in rates affect your purchasing power? Please show working so I can learn better. Thank you!

Explanation / Answer

Suppose You have $ 5,000 deposited in a CD. at interest rate of 5.5% compunded daily, Accumulated amount will be 5000*(1+5.5/36500)^(365*2) =$5,581.34 So you have saved $5,581.34 in 2 years. suppose after 1 year interest rates have changed to 5%, So accumulated balance after one year = 5000*(1+5.5/36500)^365 =5,282.68 Then after 2nd year accumulated balance will be, 5282.68*(1+5/36500)^365 =5553.51 Because of interest rate reduced he will get $27.83 (5581.34-5553.51) less. Thus his purchase power will reduce by $27.83 If interest is compounded monthly at 5.5%, Accumulated amount will be 5000 * (1+5.5/1200)^24 = 5282.04

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