Question

Your grandmother put some money in an account for you on the day you were born. This account pays 8% interest per year. On your 21st birthday the account balance was $5033.83. The amount of money that your grandmother originally put in the account is closest to: A) $600. B) $800. C) $1000. D) $1200.

Answer 1

Answer:

C. $1,000

Explanation:

The computation amount is shown below:-

Interest rate per period = Interest rate per annum ÷ Number of compounding per annum

= $8.00 ÷ 1

= 8%

Number of periods = Number of years × Number of compounding per annum

= 21 × 1

= 21

Present value = Future value × (1 ÷ (1 + rate of interest)^number of years)

= $5033.83 × (1 ÷ (1 + 8%)^21)

= $5033.83 × (1 ÷ (1.08)^21

= $5033.83 × (1 ÷ 5.033833715 )

= $5033.83 × 0.198655748

= 0.999999262

= $1,000

Therefore for computing the present value we simply applied the above formula.