Mutual fund/ Annuity

Question

You decide to contribute to a mutual fund that averages 4.6% return per year. If you contribute $550 quarterly.
Round all answers to the nearest cent as needed.

 

a) How much will be in the account after 20 years?

 

b) How much of this money did you deposit?

 

c) How much of this money is interest earned?

Answer 1

The data suggests a simple interest rate, not compounded. So, the quarterly deposits will have no effect on the annual interest.

 

The account starts with $0.00 dollars, but, at the end of year one, there will be $2,200 on which interest will be calculated at 4.6% (0.046)

 

Answering B first, the amount deposited will be $2200/year x 20years = $44,000

 

Answering A, each year the principal will be increased by $2200, so the calculation must be done for each year. The formula for this function is Future value = Payment [ (1 + Interest)ⁿ - 1) / Interest]. 

So, at the end of 20 years, the balance will be $69,744

 

Answering C, the interest will be the account balance - principal = $69,744 - 44,000 = $25,744