Question

Formula for $ amount (Y) when someone puts money in a TFSA/RRSP then withdraws it T years from now. A. Contribution amount multiplied by the interest rate and the number of years (Y = P * (1 + r)^T).

B. Initial investment divided by the time in years (Y = P / T).
C. Principal amount plus interest earned over the years (Y = P + P * r * T).
D. The sum of the initial investment and any penalties incurred (Y = P - penalty).

Answer 1

The correct formula for calculating the future value of an investment in a TFSA/RRSP considering compound interest is Y = P * (1 + r)^T, where P is the principal, r is the annual interest rate, and T is the number of years invested.

Step-by-step explanation:

The correct formula to determine the future value Y of a sum of money put into a TFSA/RRSP, considering compound interest, given contribution amount P, interest rate r, and number of years T is A: Y = P * (1 + r)^T.

This formula accounts for compound interest, where the principal amount earns interest over each period of time, and then the interest earned also earns interest in subsequent periods.

For example, if Yelberton saves $1,000,000 at a 6% annual rate for 30 years, he would end up with a substantial sum for his retirement: $1,000,000 * (1 + 0.06)^30.

If we examine the given options: B is incorrect because it simplifies to dividing the principal by the number of years, without any consideration for interest.

C represents the formula for simple interest, not compound interest, which is only correct when interest is not compounded over time.

Finally, D is incorrect because it simply subtracts a penalty from the principal, not related to the future value of an investment over time with interest.