Question
Asked Nov 13, 2019
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Lori buys a $1,075 certificate of deposit (CD) that earns 3.2% interest that compounds monthly.  How much will the CD be worth in 12 years?

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Expert Answer

Step 1

Monthly interest rate and future value will be calculated using the formula,

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Annual rate Monthly interest rate =- Number of months in a year Number of periods Future value Present value x (1 Rate of interest)

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Step 2

The monthly interest rate is calculated by dividing the annual rate with the number of months in a year. The annual rate of interest is 3.2% and hence, the monthly rate of interest comes out to be 0.267%

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Annual rate Monthly interest rate = Number of months in a year 3.2% 12 months = 0.267%

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Step 3

The future value of a lump sum amount is the product of the present value and the future value compounding factor. The present value of ...

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Number of periods Future value Present value x (1+ Rate of interest) $1,075x (1+0.00266)*4 = $1,075x1.4676 = $1,577.67

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Advanced Math

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