Question

The manager of a money-market fund has invested $4.2 million in certificates of deposit that pay interest at the rate of 5.4% per year compounded quarterly over a period of 5 years. How much will the investment be worth at the end of 5 years?

Answer 1

Answer:

549192.188 $

Step-by-step explanation:

Compounded interest is calculated each year based on the starting amount of that year.

To calculate compounded interest the following formula is used

$A = P[1 + (\frac{r}{t})]^n^t$

where

A = Amount at the end of the year

P = 4,200,000    (Principal amount at the start)

r = 0.054     (rate of interest, i.e. 5.4%)

n = 4       (compounding frequency in an year, i.e. quarterly)

t = 5        (number of years)

The solution will thus be

$A = 4200000[1+\frac{0.054}{4}]^2^0$

A = 549192.188