Isabelle wants to save up an amount of $150,000 for her son's college education fees, coming up in 5 years. Find the amount that should be invested today if the bank pays an interest rate of 5% compounded annually
What does your text say about compounded interest and how to figure it?
http://www.wikihow.com/Calculate-Compound-Interest
To find the amount that should be invested today, we can use the formula for compound interest:
A = P(1 + r/n)^(nt)
Where:
A = the future value
P = the principal amount
r = the annual interest rate
n = the number of times that interest is compounded per year
t = the number of years
In this case, Isabelle wants to save up $150,000, the interest rate is 5% (or 0.05), compounded annually (n = 1), and the time period is 5 years. We need to find the principal amount (P).
Using the formula, we can rearrange it to solve for P:
P = A / (1 + r/n)^(nt)
Now let's substitute the given values:
P = $150,000 / (1 + 0.05/1)^(1*5)
P = $150,000 / (1.05)^5
P = $150,000 / 1.27628
Therefore, Isabelle should invest approximately $117,397.77 today to have $150,000 after 5 years.