Math

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Mary B deposits $8500 into a savings account, compounded monthly at a nominal interest rate of 9 percent, as part of a savings plan that she would like to undertake in 5 years.
1) What is the effective interest rate per annum?
2) How much money would she have saved after 5 years?
3) Mary has an an emergency at the end of the second year after she had invested the money.She withdraws $5000 How much money would she receive after 5 years?

  • Math -

    1) The balance after one year with compounding is increased by a factor
    (1 +(.09/12)^12 = (1.0075)^12 = 1.093807
    The effective annual interest rate is therefore 9.3807%

    2) 8500*(1.093807)^5 = $ 13,308.29

    3) After two years and withdrawing $5000, she is left with
    8500*(1.093807)^2 - 5000
    = 10,169.52 - 5000 = 5169.52

    After three more years, that becomes
    5159.52*(1.093807)^3 = $ 6751.98

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