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#1 2008-11-01 22:55:04

azhar
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Compound Interest

If you want to withdraw Rs 25,000 at the end of each year for the next 7 years then what amount must you invest today at 5% compounded quarterly?

 

#2 2008-11-02 13:31:57

musician_14
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Re: Compound Interest

If you want to withdraw 25 000 at the end of each year, for the next 7 years, you must invest $144 165.0453.

We can check by the following....

The interest of 5% compounded quarterly may be written as (1.0125)^4 (total interest earned after each year on amount still invested).

Amount Invested:  $144 165.0453

After Year 1:  $144 165.0453 x (1.0125)^4 = 151 509.5821 after one year subtract 25000.   Amount still invested: $126 509.5821

After Year 2:  $126 509.5821 x (1.0125)^4 = 132 954,6554 after two years subtract 25000.  Amount still invested: $107 954.6554

After Year 3:  $107 954.6554 x (1.0125)^4 = 113 454.4417 after three years subtract 25000.  Amount still invested: $88 454.44168

After Year 4:  $88 454.44168 x (1.0125)^4 = 92 960.78301 after four years subtract 25000.  Amount still invested: $67 960.78301

After Year 5:  $67 960.78301 x (1.0125)^4 = 71 423.068 after five years subtract 25000.  Amount still invested: $46 423.068

After Year 6:  $46 423.068 x (1.0125)^4 = 48 788.10684 after six years subtract 25000.  Amount still invested: $23 788.10684

After Year 7:  $23 788.10684 x (1.0125)^4 = 24 999.999996 after seven years subtract 25000.  Amount still invested:  $0.00

Last edited by musician_14 (2008-11-02 13:33:38)

 

#3 2008-11-03 05:30:54

Ms. Bitters
Member

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Re: Compound Interest

OR
Using the formula approach, you first convert your nominal rate of 5% compounded quarterly into its effective rate.  Thus



You then apply the ordinary amortization formula.  Thus


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