Answer to Question #213279 in Financial Math for Mavee

Question

An amount of R5 500 is invested for a period of 4 years in a savings account. For the first year, the investment grows at a simple interest rate of 11% p.a. and then at a rate of 12,5% p.a. compounded quarterly for the rest of the period. Determine the value of the investment at the end of the 4 years.

Answer 1

P = R5500

t = 4

For the first year, the investment grows at 11% simple interest

$\therefore FV= PV (1+rn)$

Where $r=11\%$ and $n=1$

$FV=5500(1+(1×0.11))$

$FV=R6105$

At the beginning of the next year till the end of the year, t=3, the amount is compounded quarterly.

Given as

$FV=PV (1+\frac{r}{m})^{nm}$

PV= R6105 ; r= 12.5%

n=3 ;. m=4

$FV=6105(1+\frac{0.125}{4})^{3×4}$

$FV=R8831.88$

The value of the investment after 4 years is R8831.88 .