posted by Tracey on .
As a financial planner a client comes to you for investment advice. After meeting with him and understanding his needs, you offer him the following two investment options:
Option 1 (refer to section on Mathematics of Finance in your text.): Invest $23,000 in a savings account at 4.25% interest compounded quarterly.
Option 2 (refer to section on Mathematics of Finance in your text): Invest into an ordinary annuity where $5,000 is deposited each year into an account that earns 6.6% interest compounded annually.
Set up the formula for compound interest for Option 1 and the formula for Future Value of an Annuity for Option 2 in an Excel spreadsheet to calculate the amount earned at the end of 5 years.
1. Pt = Po(r + 1)n.
r = (APR/4) / 100 = (4.25/4) / 100 = 0.010625 = Quarterly percentage rate.
n = 4 comp/yr*5 yrs = 20 comp periods.
Pt = 23000(1.010625)^20,
Pt = 23000 * 1.2354 = 28413.75
Int. = Pt - Po,
Int. = 28413.75 - 23000 = 5413.75.