Personal Finance Concepts
posted by Anonymous on .
After a protracted legal case, Joe won a settlement that will pay him $11,000 each year for the next ten years. If the market interest rates are currently 5%, exactly how much should the court invest today, assuming end of year payments, so there will be nothing left in the account after the final payment is made?
Mary just deposited $33,000 in an account paying 7% interest. She plans to leave the money in this account for eight years. How much will she have in the account at the end of the seventh year?
Mary and Joe would like to save up $10,000 by the end of three years from now to buy new furniture for their home. They currently have $1500 in a savings account set aside for the furniture. They would like to make equal year end deposits to this savings account to pay for the furniture when they purchase it three years from now. Assuming that this account pays 6% interest, how much should the year end payments be?
An excel spreadsheet is very helpful for these kinds of calculations.
The balance after 1 year is B1=B0*(1+r)-P, Where B0 is the initial balance and P is the payment=11000, r is the rate of interest = .05
After 2 years its B2 = B1*(1+r)-P = (B0*(1+r)-P)*(1+r) - P
= B0*(1+r)^2 - P(1 + (1+r))
so, by extension,
B10 = B0*(1+r)^10 - P*sum[(1+r)^(n-1)]
one equation, one unknown, solve for B0
PV=FV*PVif (N=10yrs. i=5%)
PV=1,000 X 7.722
PV= $84,942.00 ANSWER
FV=PV X FVif 7% of 8 years
FV=33,000 X 1.718
How much would you repay the bank if you borrowed $7,900 at 4.3% annual interest for 6 years