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Compound Interest Example-Assignment

The document discusses calculating return on investment (ROI) for CDs and savings accounts. It provides formulas for calculating ROI based on principal amount, interest rate, compounding frequency, and length of investment. Examples are given showing how to use the formulas to calculate ROI for different scenarios, such as a 1-year CD, 3-year CD compounded annually, 27-month CD compounded monthly, and savings accounts with varying interest rates and periods. Practice problems at the end have the reader use the formulas and examples to calculate ROI for additional scenarios.

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Arqam Khan
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34 views2 pages

Compound Interest Example-Assignment

The document discusses calculating return on investment (ROI) for CDs and savings accounts. It provides formulas for calculating ROI based on principal amount, interest rate, compounding frequency, and length of investment. Examples are given showing how to use the formulas to calculate ROI for different scenarios, such as a 1-year CD, 3-year CD compounded annually, 27-month CD compounded monthly, and savings accounts with varying interest rates and periods. Practice problems at the end have the reader use the formulas and examples to calculate ROI for additional scenarios.

Uploaded by

Arqam Khan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Investing Calculating Return on Investment

Now that we reviewed examples of Compound Interest, it is time we understand how the interest is calculated. In this assignment, you will be calculating the return on investment for CDs and Savings Accounts. P= Principal r = Rate of return converted to decimals n = Years CD If compounded 1 time in a year, the formula would be =P(1 +r)n CD If compounded annually for 5 years, the formula would be =P(1 +r)^5 CD If compounded monthly, the formula would be = P(1 + R)^actual months invested Savings Account = P(1 +r/12)^n (n = # of months you leave the principal in the bank Example 1: You invest $4,000 into a 1 year CD that pays and gets compounded annually. What is your investment worth when the CD matures? P(1 + R)n $4,000(1 +.05)^1 $4,000(1.05) = $4,200

Example 2: You invest $7,500 into a 3 year CD that pays 4% and gets compounded annually. What is your investment worth when the CD matures? P(1 +r)^n $7,500(1 + .04)^3 $7,500(1.04)^3 $7,500(1.124864) = $8436.48

Example 3: You invest $2,500 into a 27 month CD that pays 3% and gets compounded monthly. What is your investment worth when the CD matures? P(1 + r/12)^27 $2,500(1 + .03/12)^27 $2,500(1 + .0025)^27 $2,500(1.0025)^27 $2,500(1.06974) = $2,674.35 In this example, we are compounding monthly over a 27 month period. We must therefore divided the interest by the number of compounding periods, (12) and use the actual months compounded as the exponent.

Example 4: You deposited $2,100 into a savings account. The bank pays you 2% interest. What is your balance after interest is added in after one month? P((1 +r/12)^1 $2,100(1 + .02/12)^1 $2,100(1+.00167)^1 $2,100(1.00167) = $2103.51

Investing Calculating Return on Investment

Using the formulas and examples provided on page one of this document, find the value of your investment if you deposited: 1. $10,000 into a 1 year CD paying 5.4% interest. (no compounding) $10,000(1+.054) =$10,540

2. $20,000 into a 33 month CD paying 3.5% interest compounded monthly.

$20,000(1+.035/12)^33 =$22,017.60 *based off of example 3

3. $12,500 into a Savings Account paying 3%, you leave it in for one month. $12,500(1+(.03/12))^1 =$12531.25

4. $8,500 into a Saving Account paying 2.3% compounded monthly, you leave in untouched for 5 months. $8,500(1+.023/12)^5 =8,581.77

5. $5,000 into a Savings Account paying 4.1%, compounded annually, you leave it untouched for 6 years. $5,000(1+.041)^6 =$6,363.18

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