Question

Solve with BA II Plus

A client invests €20,000 in a four-year certificate of deposit (CD) that annually pays interest of 3.5%. The annual CD interest payments are automatically
reinvested in a separate savings account at a stated annual interest rate of 2% compounded monthly. At maturity, the value of the combined asset is closest to

A €21,670.
B €22,890.
C €22,950

Please help me to solve this problem with finance calculator BA II plus

Answer 1

So ,the most easy way to solve this type of problem is to make a timeline of the cashflows
But another way is to think about the process
Now i will try to make you understand the process

As the interest of the deposit is again going to a separate account , the principal 20,000 will remain same at the end
So Value at maturity = 20,000 + interest compounded at 2 % monthly

Now we have to calculate just how much interest has earned on reinvestment at 2 % compounded monthly
Consider it as an annuity of 700 and assume we had to find FV of this annuity
But first we need to change the interest rate as it is compounded monthly
r = (((1+ 2/1200)^12)-1) *100
so the rate is 2.0184 , so Y=2.0184
In the calculator Put N= 4 , PMT= -700 , PV= 0 , so Y=2.0184 and Compute FV
Then Add FV to the 20,000 , You will get the answer

FV will be = 2885
Value at maturity = 20,000 +2885 = 22885
So answer is (B)