Question

The following pair of investment plans are identical except for a small difference in interest rates. Compute the balance in the accounts after 10 and 30 years. Discuss the difference Chang invests $600 in a savings account that eams 3.75% compounded annually. Kio invests $600 in a different savings account that earns 4.0% compounded annually Aller 10 years Chang will have a balance of approximately $ After 30 years Chang will have a balance of approximately (Round to the nearest cont as needed.)

Answer 1

The amount is computed as shown below:

Future value = Present value ( 1 + r )ⁿ

The amount in the account of Chang is computed as follows:

The amount after 10 years is computed as shown below:

= $ 600 x 1.0375¹⁰

= $ 867.03 Approximately

The amount after 30 years is computed as shown below:

= $ 600 x 1.0375³⁰

= $ 1,810.48 Approximately

The amount in the account of Kio is computed as follows:

The amount after 10 years is computed as shown below:

= $ 600 x 1.04¹⁰

= $ 888.15 Approximately

The amount after 30 years is computed as shown below:

= $ 600 x 1.04³⁰

= $ 1,946.04 Approximately

The difference in the accounts of Chang and Kio is on account of higher interest rate. Since Kio is earning higher interest than Chang, hence the amount in the account of Kio is higher than the amount in the account of Chang.

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