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2 April, 17:47

You plan to make five deposits of $1,000 each, one every 6 months, with the first payment being made in 6 months. You will then make no more deposits. If the bank pays 6% nominal interest, compounded semiannually, how much will be in your account after 3 years? One year from today you must make a payment of $4,000. To prepare for this payment, you plan to make two equal quarterly deposits (at the end of Quarters 1 and 2) in a bank that pays 6% nominal interest compounded quarterly. How large must each of the two payments be?

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  1. 2 April, 20:13
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    Check the calculation below.

    Explanation:

    a) Amount in account after 3 years:

    = $1,000 (1 + 0.03) 5 + $1,000 (1 + 0.03) 4 + $1,000 (1 + 0.03) 3 + $1,000 (1 + 0.03) 2 + $1,000 (1 + 0.03)

    = $1,159.27 + 1,125.51 + 1,092.73 + 1,060.90 + 1,030

    = $5,468.40

    b) Calculation of amount of payment:

    Let the amount of each of two payment be "P".

    Now, $4,000 = P (1 + 0.015) 3 + P (1 + 0.015) 2

    or,$4,000 = 1.0457 P + 1.0302 P

    or, P = $4,000 / 2.0759

    or, P = 1,927 (Approx)
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