- This topic has 1 reply, 2 voices, and was last updated 8 years ago by
.
- Posts
Hello Sir
Q: One thousand dollars is invested on the first day of each year for three years. Interest is paid quarterly at a rate of 2 % per quarter.
What is the value of the investment after three complete years (to the nearest $)
The working: 1,000 x (1.02)^12 + 1,000 x (1.02)^8 + 1,000 x (1.02)^4
=1,000 x (1.2683 + 1.1717 + 1.0824)
=1,000 x 3.5223
= $ 3,522Can you explain to me about the working of the answer? I can’t figure it out or it has alternative way to do it? Thank you.
I assume you have watched my free lectures on this, and so you know what we mean by compound interest.
Every period (which in this case is of 3 months) we multiply by 1.02 to add on interest at 2%.
The first investment of 1,000 is there for 3 years. 3 years is 12 periods of 3 months each and so we multiply by 1.02^12.
The second investment is there for 2 years, which is 8 periods of 3 months each and so we multiply by 1.02^8.
The third investment is there for 1 year, which is 4 periods of 3 months, and so we multiply by 1.02^4.If you have not watched the lectures then I do suggest that you do – they are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.
- You must be logged in to reply to this topic.