Question

A husband and wife plan to save money for their daughter's college education in 5 years. They decide to purchase an annuity with a semiannual payment earning 10.5% compounded semiannually. Find the future value of the annuity in 5years if the semiannual payment is $3150. Round your answer to the nearest cent.

The future value of the annuity is ?

Answer 1

$40,601.92

Explanation:

First, convert R as a percent to r as a decimal

r = R/100

r = 1.5/100

r = 0.015 per year,

Then, solve the equation for P

P = I / ((1 + r/n)nt - 1)

P = 3150 / ((1 + 0.015/2)(2)(5) - 1)

P = 3150 / ((1 + 0.0075)(10) - 1)

P = $40,601.92

Summary:

The principal investment required to get a total interest of $3150 from compound interest at a rate of 1.5% per year compounded 2 times per year over 5 years is $40,601.92.