Question

The managers of a pension fund have invested $2.5 million in U.S. government certificates of deposit (CDs) that pay interest at the rate of 2.1%/year compounded semiannually over a period of 20 years. At the end of this period, how much will the investment be worth? (Round your answer to four decimal places.)

Answer 1

The answer is $3.8 million

Step-by-step explanation:

The payment is semiannual i.e it will be paid twice in a year.

Present value(PV) = $2.5 million

Interest rate = 1.05%(2.1% ÷ 2)

Number of periods = 40 years(20 years x 2)

The formula is FV = PV(1 + r)^n

= $2.5 million(1 + 0.0105)^40

= $2.5 million(1.0105)^40

= $2.5 million x 1.5186

= $3.8 million

The Investment will therefore worth $3.8 million at the end of the period.