Question

You have been paying $1000 every month for 6 years to a friend of yours who is extremely lazy to find a job. The annual interest rate is 9%. What is the worth of your money after 6 years with:
a) Annual compounding
b) Every-six-months compounding

Answer 1

Answer:

a)

$90,280.01

b)

$92,784.19

Explanation:

Use the following formula to calculate the worth of money

Worth of money = Periodic Payment x ( ( ( 1 + Periodic Interest rate )^numbers of periods ) - 1 ) / Periodic Interest rate

a)

Where

Periodic Payment = $1,000 x 12 months per year = $12,000 annually

Periodic interest rate = 9%

Numbers of periods = 6 years

Placing values in the formula

Worth of money = $12,000 x ( ( ( 1 + 9% )^6 ) - 1 ) / 9%

Worth of money = $90,280.01

B)

Where

Periodic Payment = $1,000 x 6 months = $6,000

Periodic interest rate = 9% X 6/12 = 4.5%

Numbers of periods = 6 years x 12/6 = 12

Placing values in the formula

Worth of money = $6,000 x ( ( ( 1 + 4.5% )^12 ) - 1 ) / 4.5%

Worth of money = $92,784.19