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31 August, 13:55

You are considering investing in a European bank account that pays a nominal annual rate of 18%, compounded monthly.

If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000?

a. 23

b. 27

c. 32

d. 38

e. 44

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  1. 31 August, 15:04
    0
    d. 38

    Explanation:

    This is an Annuity Due type of question. You get the hint from the statement " ... $5,000 at the beginning of each month," In an Annuity due, the recurring payments occur at the beginning of the period i. e annually, quarterly or (monthly in this case)

    So using a financial calculator on "BGN" mode

    nominal rate of 18% is the I/Y. However, since it is monthly compounded, convert it to a monthly rate.

    I/Y = 18%/12 = 1.5%

    PMT; recurring cashflow = - 5,000

    FV; future value = 250,000

    PV; present value = 0 (note: in annuity, use 0 for the variable not given)

    then CPT N = 37.16

    Therefore, it will take approximately 38 months
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