Time Value Money

Topics: Money, Debt, Interest Pages: 2 (488 words) Published: April 4, 2013
1. You place $5,000 in a savings account earning 2.50% interest compounded annually. How much will you have at the end of four years? How much would you have at the end of four years if interest is compounded semiannually?

If interest compounded annually I would have saved $5,519.06 at the end of four years. If interest compounded semiannually I would have saved $5,522.43 at the end of four years. 2. Change the interest rate to a higher rate. How much will you have at the end of four years if interest is compounded annually at a rate of 3%? How much would you have at the end of four years if interest is compounded semiannually?

If the interest compounded annually I would have saved $5,627.54 at the end of four years.

If the interest compounded semiannually I would have saved $5,632.46 at the end of four years.

3. Now change the interest rate to a lower rate. How much will you have at the end of four years if interest is compounded annually at a rate of 2%? How much would you have at the end of four years if interest is compounded semiannually?

If the interest compounded annually I would save $5,412.28 at the end of four years.

If the interest compounded semiannually I would save $5,412.16 at the end of four years.

4. You have $10,000 in credit card debt, at a 14% interest rate. When is it beneficial to pay off the debt vs. putting money in a savings account? Explain the pros and cons of either option. I think with a 14% interest rate is would be beneficial to pay off the debt instead of putting money in a savings account. I would pay it off as fast as possible because the cost would be after 1 year with 14% $11,449.00, and after four years $17,181l86. This would be a big lump sum of money I could save if I pay it off fast. Pros and cons of saving money: I would have some savings I could use as collateral when applying for loans and I also would gain interest on my savings. Interest rates on savings accounts are usually lower,...
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