Giulia has been a good saver during her time at university whilst working a part-time job, and has managed to save an amount of $15 000 whilst completing her degree. She wants to invest this money for the next 5 years, as otherwise she will be tempted to spend it on a holiday or a new car. Giulia seeks your assistance as she knows you are currently studying a finance unit. a) Determine the value in 5 years of a $15 000 investment at a compound interest rate of 6.75% p.a. compounding annually. Show formula, variables, calculation and a concluding statement in your response. Formula=Future value = PV*(1+r)n Variables= PV - Investment amount i.e. $15,000 r - Annual interest rate i.e. 6.75% n - Period i.e. 5 Years Calculation= Future value = PV*(1+r)n Future value = 15000*(1+0.0675)5 Future value = 15000*1.06755 Future value = 15000*1.38624316708076 Future value = 20793.65 Concluding Statement=Value of investment after 5 years = $20,793.65 b) If Giulia finds a similar investment to part a) that compounds quarterly, which investment would Giulia prefer? Why are these amounts different? c) Calculate the effective interest rate from part b). Show formula, variables, calculation and a concluding statement in your response.
Giulia has been a good saver during her time at university whilst working a part-time job, and has managed to save an amount of $15 000 whilst completing her degree. She wants to invest this money for the next 5 years, as otherwise she will be tempted to spend it on a holiday or a new car.
Giulia seeks your assistance as she knows you are currently studying a finance unit.
a) Determine the value in 5 years of a $15 000 investment at a
Show formula, variables, calculation and a concluding statement in your response.
| Formula= |
|---|
| Variables=
PV - Investment amount i.e. $15,000 r - Annual interest rate i.e. 6.75% n - Period i.e. 5 Years |
| Calculation=
Future value = PV*(1+r)n Future value = 15000*(1+0.0675)5 Future value = 15000*1.06755 Future value = 15000*1.38624316708076 Future value = 20793.65 |
| Concluding Statement=Value of investment after 5 years = $20,793.65 |
b) If Giulia finds a similar investment to part a) that compounds quarterly, which investment would Giulia prefer? Why are these amounts different?
c) Calculate the effective interest rate from part b).
Show formula, variables, calculation and a concluding statement in your response.
d) What is the effective interest rate? What does it take into consideration that the nominal rate does not?
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