1. Kelly Malone plans to have $40 withheld from her monthly paycheck and deposit

Question

1. Kelly Malone plans to have $40 withheld from her monthly paycheck and deposited in a savings account that earns 12% annually, compounded monthly. If Malone continues with her plan for two and one-half years, how much will be accumulated in the account on the date of the last deposit?

2. Otto Co. borrows money on April 30, 2016, by promising to make four payments of $29,000 each on November 1, 2016; May 1, 2017; November 1, 2017; and May 1, 2018.

a. How much money is Otto able to borrow if the interest rate is 6%, compounded semiannually?

b. How much money is Otto able to borrow if the interest rate is 10%, compounded semiannually?

c. How much money is Otto able to borrow if the interest rate is 12%, compounded semiannually?

Explanation / Answer

Dear student, only one question is allowed at a time. I am answering the first question

When interest is compounded monthly, interest rates are divided by 12 and time period is multiplied by 12

So, interest rate ( r ) = 12 / 12 = 1% per month

Time ( n ) = 2.5 years x 12 = 30 months

Periodic payments ( P ) = $40

Future value of an annuity

= P x [ (1 + r) ^ n – 1] / r

= $40 x [ 1.01 ^ 30 – 1] / 0.01

= $40 x 34.784891

= $ 1,391.40

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