Problema Solution
Brown needs $5,000 in three years. If the interest rate is 9% compounded monthly, how much should she save at the end of each month to have that amount in three years?
Answer provided by our tutors
The formula for calculating the future value of an ordinary annuity (where a series of equal payments are made at the end of each of multiple periods) is:
FV = P [((1 + r)n - 1) / r]
Where:
FV = $5,000 The future value of the annuity stream to be paid in the future
P = The amount of each annuity payment
r = 0.09 or 9% The interest rate
n = 12*3 = 36 The number of periods over which payments are made
FV = P [((1 + r)n - 1) / r]
P = FV/[((1 + r)n - 1) / r]
P = 5000/[((1 + 0.09)*36 - 1) / 0.09]
P = $11.77
She should deposit $11.77 at the end of each month.