1. If you deposit $10,000 in a bank account that pays 10% interest annually, how much will be in your account after 5 years? 2. What is the present value of a security that will pay $5,000 in 20 years if securities of equal risk pay 7% annually? 3. Your parents will retire in 18 years. They currently have $250,000, and they think they will need $1 million at retirement. What annual interest rate must they earn to reach their goal, assuming they don’t save any additional funds?

Question
Asked Aug 31, 2019
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1. If you deposit $10,000 in a bank account that pays 10% interest annually, how much will be in your account after 5 years?

 

2. What is the present value of a security that will pay $5,000 in 20 years if securities of equal risk pay 7% annually?

 

3. Your parents will retire in 18 years. They currently have $250,000, and they think they will need $1 million at retirement. What annual interest rate must they earn to reach their goal, assuming they don’t save any additional funds?

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Expert Answer

Step 1

Present value is the current value of a future amount that is to be received or paid out.

Future value means the value of asset at the specified date in the future or it is the amount that states how much the current investment will grow in over time.

Step 2
  1. To calculate the future value of amount deposited with bank:

FV= Future value

PV= Present value of investment

i= Interest rate per period

n = Number of periods

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FV =PV(1+i) $10,000 (1+0.10) -$10,000x1.161051 =$16,105.10

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Step 3
  1. To calculate the present value of security:

     FV= $5,000

  &n...

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FV PV (1) $5,000 (1+0.7)20 $5,000 3.8697 $1,292.09

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