Assume that you have x dollars saved (you choose a specific dollar amount) and w
ID: 2464693 • Letter: A
Question
Assume that you have x dollars saved (you choose a specific dollar amount) and would like to purchase a used car in two years. Calculate the interest earned over the two-year span on your chosen dollar amount at the 5.50% interest rate, compounded daily, for a one year CD. Show your work. Calculate how much you will have saved with this account in two years. Show your work. Investigate bank interest rates available in your area for a one year CD. Calculate how much money you will have in two years if the interest is compounded monthly or continuously. Show your work. How did the change in rates affect your purchasing power?
Explanation / Answer
Amount = Principal * (1+ interest rate)^number of period
The change in rates has a huge impact on the purchasing power. Suppose if the inflation rate is high it will reduce the purchasing power and vice versa.
Calculated continuously Interst rate 5.50% Daily interest rate 0.02% Days in a year 365 Dollar amount assumed 100 Amount after one year 105.65 Amount after two year 111.63 Total amount 217.28 Calculated Monthly Interst rate 5.50% Monthly interest rate 0.46% Months in a year 12 Dollar amount assumed 100 Amount after one year 105.64 Amount after two year 111.60 Total amount 217.24