You need to have $30,250 in 17 years. You can earn an annual interest rate of 4 percent for the...

Question:

You need to have $30,250 in 17 years. You can earn an annual interest rate of 4 percent for the first 5 years, 4.6 percent for the next 4 years, and 5.3 percent for the final 8 years. How much do you have to deposit today?

Interest:

The interest income or expense could be determined using the compound interest rate method or the simple interest rate method. The simple interest is computed over the principal amount.

Answer and Explanation:

The required amount to be deposited today is $16,731.19.

Explanation: The required amount to be deposited today is $16,731.19 ($30,250/1.808), which has been computed by dividing the future money by interest rate increased by 100%. The amount has been obtained by reverse computation.

Working Note: The total expected interest over the period is 80.8% (4% x 5 + 4.60% x 4 + 5.30% x 8).

Note: The value has been computed based on the simple interest rate.


Learn more about this topic:

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How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
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