AMORTIZED LOANS

Question

A bank offers a CD that pays a simple interest rate of 8.5%. How much must you put in this CD now in order to have 4,000 for a home-entertainment center in 5 years.

 

PLEASE SHOW ALL STEPS AND GIVE ANSWER

Answer 1

Because of simple interest only:

PV(t) = 4000 * (1 - 0.085t)

PV(5) = $4,000 * (1 - 0.085*5) = $4,000 (1 - 0.425) = $4,000 - $1,700 = $2,300

So, must deposit $2,300 today, earning 8.5% simple interest for 5 years, to have $4,000 in 5 years.