1

$30,000 is invested at the start of each year for the next 20 years. The money invested earns interest at an annual effective rate of 4%. The interest earns interest at an effective rate of 2% a year. If all interest payments are made at the end of the year, find the value of the investment at the end of 20 years.

According to the textbook the answer is $\$886\,999.03$. I'm confused as to how to account for the interest earned each year earning new interest at a different rate (2%) than the account (4%). I've done problems involving removing & reinvesting interest earned on an account, where you treat the interest earned yearly as a separate account, but I don't see how that can be applied here.

Mike Pierce
  • 18,938
user377161
  • 11

1 Answers1

0

I was being stupid in that first post. The 30,000 only is added to. The interest is an increasing annuity. So your two calculations are:$$30,000*20=600,000$$ and$$30,000(.04)(Is)\overline{20}|2%=286,800$$So the total accumaulted amount is $$600,000+286,800=$886,800$$

Drunk Deriving
  • 387