Don't Have A Clue!!

steph · November 28th 2006, 04:28 PM

Financial Math

How much should be invested at 8% compounded semiannually in order to have $5000 at the end of 8 years?

**Soroban** · November 28th 2006, 05:10 PM

Hello, steph!

You're expected to know the compound interest formula:

. . $A \;= \;P(1 + i)^m$

. . where: . $\begin{array}{cccc} a\:= \\ P\:= \\ i\:=\\n\:=\end{array}<br /> \begin{array}{cccc}\text{final amount} \\ \text{principal invested} \\ \text{periodic interest rate} \\ \text{number of periods}\end{array}$

How much should be invested at 8% compounded semiannually
in order to have $5000 at the end of 8 years?

We are given: . $\begin{array}{ccc}A\:= \\ i\:= \\ n\:=\end{array}<br /> \begin{array}{ccc}5000 \\ 8\%/2 = 0.04 \\ 2\times8 = 16\end{array}$

So we have: . $5000 \;=\;P(1+0.02)^{16}$

Then: . $P \;= \;\frac{5000}{(1.02)^{16}} \;=\; 3642.229069$

Therefore, $\$3,642.23$ should be invested.

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