Here is a fairly easy question that chaps my ass because it does not specify when the eight payments are put into the fund. beginning of year? end of year?? each year? every other year? 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 fo the fifth year. Thereafter, all money acccumulated in the fund will earn a reduced interest rate of 4% compounded annually until the end of the tenth year. How much money will the investor have in the fund at the end of ten years assuming no withdrawls are made? A. $8416.32 B. 8,872.93 C. 9,251.82 D. $9,549.11 I am obviously not looking at this problem correctly…maybe someone can shed some light on this.
So look at it this way Years 3,4,5 --> Deposit 5000$ @ 5% Years 6 thro’ 10 Remaining 5 payments @ 4% Calculate FV of each stream Stream 1: PMT=1000, N=3, I/Y=5%, FV = 3152.5 Stream 2: PV = 3152.5, PMT=1000,I/Y=4, N=5 FV =? 9251.82 Answer C
Now I see…i was doing years 1-5 Deposit 5000 @5% Years 6-8 Deposit 3000 @ 4% 9-10 Deposit 0 @ 4% P.S. Is this a typo? "Years 3,4,5 --> Deposit 5000$ @ 5% Years 6 thro’ 10 Remaining 5 payments @ 4% " Do you mean ? Years 3,4,5 --> Deposit 3000$ @ 5%
I meant Years 3,4 and 5 deposit 1000 per year @ 5% since you are starting to deposit 3 years from now, and the interest rate switch happens end of year 5.