The managers of a pension fund have invested $2.5 million in U. S. government certificates of deposit (CDs) that pay interest at the rate of 2.1%/year compounded semiannually over a period of 20 years. At the end of this period, how much will the investment be worth? (Round your answer to four decimal places.)

Question

Business

Susan Roberson

16 April, 00:40

The managers of a pension fund have invested $2.5 million in U. S. government certificates of deposit (CDs) that pay interest at the rate of 2.1%/year compounded semiannually over a period of 20 years. At the end of this period, how much will the investment be worth? (Round your answer to four decimal places.)

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Answers (1)

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Milo Deleon · Answer 1

The answer is $3.8 million

Explanation:

The payment is semiannual i. e it will be paid twice in a year.

Present value (PV) = $2.5 million

Interest rate = 1.05% (2.1% : 2)

Number of periods = 40 years (20 years x 2)

The formula is FV = PV (1 + r) ^n

= $2.5 million (1 + 0.0105) ^40

= $2.5 million (1.0105) ^40

= $2.5 million x 1.5186

= $3.8 million

The Investment will therefore worth $3.8 million at the end of the period.