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FINANCE annuity poblem, confused

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  1. Oct 18, 2012 #1
    Eve deposited $8.000 in a 3-year certificate of deposit, which pays 2.2% compounded monthly. Find the account value at the end of the 3rd year and the amount of interest earned during the whole 3-year period.

    I think i use the payment to a sinking fund formula but i am not sure. possible formula: R=S*i/((1+i)^n -1)

    Any help would be great thank you!
     
  2. jcsd
  3. Oct 18, 2012 #2
    To start, do you have a formula for interest compounded monthly?

    To find the interest earned in the third year, (total amount after 36 months)-(total amount after 24 months).
     
  4. Oct 19, 2012 #3

    Ray Vickson

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    Do not use formulas to start with, especially if you do not understand them and are not sure which ones to use. Just do the problem directly, or at least, *start out* doing it directly. After you see the "pattern", then---and only then---should you contemplate using a formula to finish the problem, because then you will know which formula applies.

    So, here are some steps you need to follow to get started.

    (i) What is the monthly interest rate? The question is vague here: is the 2.2% an _annual_ rate or is it the monthly rate? Personally, I suspect it is an annual rate. In that case, how do you determine the monthly rate?

    (ii) After completing (i), how do you determine the value at the end of the first month? What is the value at the end of the second month? The third month?

    (iii) By examining (ii), can you find a general formula for the value at the end of month n?

    RGV
     
    Last edited: Oct 19, 2012
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