You have $100,000 you want to invest for the next 30 years. You are offered an i
ID: 2774874 • Letter: Y
Question
You have $100,000 you want to invest for the next 30 years. You are offered an investment plan that will pay you 10% per year for first the 20 years and 7% for the last 10 years.
Requirements to answer this question –
Create a timetable for this problem.
How much money will you have at the end of the 30 years?
Does it matter if the investment plan pays you 10% per year for the first 20 years and 7% percent per year for the next 10 years? Why or why not?
How does the time value of money work?
How does interest on interest work?
How does simple and compounding interest work?
Explanation / Answer
Time Table
Answer: Yes Rate of Interest of the the investment plan matters to calculate Future Value of the Investment. We have to compound interest from different rates given on diffrerent Time Period.
Answer: Time Value of money and interest on interest works in the following manner:
Simple and Compounding Interest Working
Simple Interest: Interest is charged only on Principal Amount.
Principal
100000
Compounding Interest: Interest is charged on cumulative principal and interest (Interest on Interest is also charged)
Year Principal Interest Closing 1 100000 10000 110000 2 110000 11000 121000 3 121000 12100 133100 4 133100 13310 146410 5 146410 14641 161051 6 161051.0 16105.1 177156.1 7 177156.1 17715.6 194871.7 8 194871.7 19487.2 214358.9 9 214358.9 21435.9 235794.8 10 235794.8 23579.5 259374.2 11 259374.2 25937.4 285311.7 12 285311.7 28531.2 313842.8 13 313842.8 31384.3 345227.1 14 345227.1 34522.7 379749.8 15 379749.8 37975.0 417724.8 16 417724.8 41772.5 459497.3 17 459497.3 45949.7 505447.0 18 505447.0 50544.7 555991.7 19 555991.7 55599.2 611590.9 20 611590.9 61159.1 672750.0 21 672750.0 47092.5 719842.5 22 719842.5 50389.0 770231.5 23 770231.5 53916.2 824147.7 24 824147.7 57690.3 881838.0 25 881838.0 61728.7 943566.7 26 943566.7 66049.7 1009616.3 27 1009616.3 70673.1 1080289.5 28 1080289.5 75620.3 1155909.7 29 1155909.7 80913.7 1236823.4 30 1236823.4 86577.6 1323401.1Related Questions
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