In three years an investor deposits the first of eight $1000 payments into a special fund. The fund will earn interest at the rate of 5% per year until the end of the 5th year. Thereafter, all money accumulated in the fund will earn a reduced interest rate of 4% compounded annually until the end of the 10th year. How much money will the investor have in the fund at the end of the ten years assuming no withdrawls A) $8,416.32 B) $8,872.93 C) $9,251,82 D) $9,549.11

c

C is correct

can someone provide the calculations setup… am getting 10099. as my answer, and it’s not one of the choices…

Find the FV for 3 years at 5% and add to the FV for next 5 years at 4% PMT = 1000, N=3, I/Y=5, PV=0 , FV=? PMT= 1000 N=5 , I/y=4, PV=0 and FV=? Add both the FVs and get the answer

Boston I tried it your way and got 8,568.82 I did 1000=PMT 5=N 5=I/Y CPT FV = 5,525.63 Then I made that my PV and did: 1000=PMT 3=N 4=I/Y CPT FV = 9,337.18 which isn’t even a choice. What is really throwing me off is the first part, “In 3 years…” Not sure what to do with that in 3 years part… Can someone elaborate on how they solved it? Thanks.

1000=PMT 3=N 5=I/Y CPT FV = 3152.5 PV=3152.5 1000=PMT 5=N 4=I/Y CPT FV = 9251.82 ans C

Answer C method PMT = 1000, N=3, I/Y=5, PV=0 , FV1=???(3152.5) PMT= 1000 N=5 , I/y=4, PV=FV1 and FV2=? The answer is FV2 i.e. 9251.82

OK, I get it now. You are only earning 5% from t=0 to t=5, which only encompasses the first 3 1,000 payments. So the 5 payments after that earn 4%. Got it now. Tough question! But a good one…

I have a question for reema and cpk123: Total N you input is 8 years (=3+5). Total length of the period is 10 years. What happened to the fund from end of year 3 to end of year 5? The fund is still earning 5% interest before 5-year period of reduced interest of 4%. Thanks for enlightening me.

problem says In three years an investor deposits the first of eight $1000 payments into a special fund. The fund will earn interest at the rate of 5% per year until the end of the 5th year. so from year 3 to year 5 5% interest is earned… captured in 1000=PMT 3=N 5=I/Y CPT FV = 3152.5

agree with cpk…the catch is “In ‘three’ years an investor deposits the first of ‘eight’ $1000 payments into a special fund.” so essentially there are eight payments starting from the third year.

hmm… such a tricky wording! Thanks for your clarification.