Answer to Question #161172 in Financial Math for Hekl

Question

Describe the payments, interest rates, and type of compounding necessary for a 15-year annuity with a future value between $10 000 and $12 000. Use two different compounding periods, each at a different interest rate, to modify the amounts shown.

Answer 1

Let us assume that the basic investment or the payment is fixed.

We start with $540 yearly investment.

Generally, the compound Interest is around 5%.

Compounding periods can vary depending on the party which takes your money.

Formula for calculating Compound Interest is

Final Value = $installment*\frac{1-(1+r)^{-n}}{r}$

where,

n is no. of times interest is applied per time period

r is rate of interest

Final Amount is given, total time period is given.

Keeping one of the remaining variables as constants, we can compute the other one.

We can choose rate of interest and initial amount such that the final amount satisfies the condition by hit and trial.

we could also use a single variable in the whole equation and compute it.

For Compounding period of 1 months at 5% CI a payment of $45 at the end of 15-years will value

$11,965.66.

For Compounding period of 1 year at 4.5 % CI a payment of $540 at the end of 15- years will Value $11,728.44.