You are hoping to buy a house in the future and recently received an inheritance
ID: 2703859 • Letter: Y
Question
You are hoping to buy a house in the future and recently received an inheritance of $22,000.00. You intend to use your inheritance as a down payment on you house.
a) Ia) If you put your inheritance in an account that earns 7 percent interest compounded annually, how many years will it be before your inheritance grows to $35,000?
b) Ib) If you let your money grow for 10.5 years at 7 percent, how much will you have?
c) c) How long will it take your money to grow to $35,000.00 if you move into an account that pays 3 percent compounded annually? How long will it take your money to grow $35,000.00 if you move it into an account that pays 11 percent?
d) D) What does all this tell you about the relationship among interest rates, time, and future sums?
Explanation / Answer
22000*(1.07)^n = 35000
nlog(1.07) = log(35000/22000)
n = 6.86
22000*(1.07)^10.5 = 44766.42
22000*(1.03)^n = 35000
nlog(1.03) = log(35000/22000)
n = 15.71
22000*(1.03)^n = 35000
nlog(1.11) = log(35000/22000)
n = 4.45
interest rate increases, time required to achieve the same future amount decreases i.e. if the future value is constant, rate of interest and the no. of periods is inversely related.