A bank offers a CD that pays a simple interest rate of 2.5%. How much must you put in this CD now in order to have $5000 for a graduation trip in 4 years?
The formula to calculate the future value of an investment with simple interest is:
A = P(1 + rt)
Where:
A = Future value
P = Present value (initial investment)
r = Interest rate
t = Time in years
In this case, we want to find the present value (P) that we need to invest now in order to have $5000 in 4 years. We already know that the interest rate (r) is 2.5% or 0.025 and the time (t) is 4 years. We can plug these values into the formula and solve for P:
$5000 = P(1 + 0.025 * 4)
$5000 = P(1 + 0.1)
$5000 = P(1.1)
Now, divide both sides by 1.1:
P = $5000 / 1.1
P = $4545.45
Therefore, you would need to put $4545.45 into the CD now in order to have $5000 for a graduation trip in 4 years.