1. ## Compound interest

How much will you have accumulated over a period of 20 years if, in an IRA which has a 10% interest rate compounded monthly, you annually invest:
a)$1 b)$100
c)$20,000 d) Part (a) is called the effective yield for an account. How could part (a) be used to determine parts (b) and parts (c)? 2. Originally Posted by lililet11 Could someone help me please? How much will you have accumulated over a period of 20 years if, in an IRA which has a 10% interest rate compounded monthly, you annually invest: a)$1
b)$100 c)$20,000
d) Part (a) is called the effective yield for an account. How could part (a) be used to determine parts (b) and parts (c)?
Are you familiar with the formula ?
$\displaystyle A=P(1+i)^n$
where A is amount owed or ended up with
I is the interest rate changed to a decimal
P is the principal amount
N is the number of compounding periods

3. Originally Posted by lililet11
How much will you have accumulated over a period of 20 years if, in an IRA which has a 10% interest rate compounded monthly, you annually invest:
a)$1 b)$100
c)$20,000 d) Part (a) is called the effective yield for an account. How could part (a) be used to determine parts (b) and parts (c)? Originally Posted by euclid2 Are you familiar with the formula ?$\displaystyle A=P(1+i)^n $where A is amount owed or ended up with I is the interest rate changed to a decimal P is the principal amount N is the number of compounding periods Or if t is the time in years you are compounding, the amount you should end up with will be$\displaystyle A=P(1+\frac{i}{n})^{nt} $Since if the percent of interest you get every year is i, the percent of interest you get each compounding period would be$\displaystyle \frac{i}{n}$. 4. How much will you have accumulated over a period of 20 years if, in an IRA which has a 10% interest rate compounded monthly, you annually invest: Since you are investing annually, you will need the formula:$\displaystyle F = P(1+i)^{t}+A\frac{(1+i)^{t}-1}{i}$F is the final value of the investment P is the initial value of the investment t is the number of years A is the amount invested annually i is the "real" annual interest, given by$\displaystyle (1+I/k)^{k}-1$where k is the number of interest compoundings per year and I is the listed annual interest rate. 5. ## compound interest Thank you all for your help, I do know how to use the formula to find compound interest, part (d) is where i'm stuck. Effective yield, what should I do there? 6. ## compound interest Thanks for your help, but I do know how to use the formula, my biggets problem is part (d), it's asking: Part (a) is called the effective yield of an account. How could part (a) be used to determine parts (b) and (c) ? 7. Never mind. 8. Since P=0,$\displaystyle F = A\frac{(1+i)^t-1}{i}$If i and t are considered constants, then F is proportional to A. so if A=100 then F will be$\displaystyle 100\times effectiveYield$This formula does not apply because the money is being invested annually ie. each year the investor deposits a fixed amount into the account. This is the correct formula for a single initial investment. 9. Originally Posted by badgerigar Since P=0,$\displaystyle F = A\frac{(1+i)^t-1}{i}$If i and t are considered constants, then F is proportional to A. so if A=100 then F will be$\displaystyle 100\times effectiveYield$This formula does not apply because the money is being invested annually ie. each year the investor deposits a fixed amount into the account. This is the correct formula for a single initial investment. Thanks for pointing it out. How could I have missed the word "annually"? I don't know. My bad. 10. Originally Posted by lililet11 Could someone help me please? How much will you have accumulated over a period of 20 years if, in an IRA which has a 10% interest rate compounded monthly, you annually invest: a)$1
b)$100 c)$20,000
d) Part (a) is called the effective yield for an account. How could part (a) be used to determine parts (b) and parts (c)?
With a given nominal rate j compounded m times per year, we define the corresponding effective rate to be that rate w which, if compounded annually, is equivalent to the given rate. That is,
$\displaystyle w = \frac{{{\rm{interest earned in one year}}}}{{{\rm{principal invested at the beginning of the year}}}}$
In your particular case, if $1 is invested at the rate 10% compounded 12 times per year, then$\displaystyle
w_{{\rm{effective rate of 10\% compounded monthly}}} = \left( {1 + {\textstyle{{0.10} \over {12}}}} \right)^{12} - 1
$Since you’re seeking to calculate the accumulated value of an annual investment over a period of 20 years, you need to make use of the future value formula of an annuity with w = i, n = 20 years, and R =$1, $100, or$20,000.

For the beginning of year deposits/investments, use
$\displaystyle \ddot S = R \cdot \frac{{\left( {1 + i} \right)^n - 1}}{i} \cdot \left( {1 + i} \right)$
For the end of year deposits/investments, use
$\displaystyle S = R \cdot \frac{{\left( {1 + i} \right)^n - 1}}{i}$

11. Originally Posted by lililet11
How much will you have accumulated over a period of 20 years if, in an IRA which has a 10% interest rate compounded monthly, you annually invest:
a)$1 b)$100
c)$20,000 d) Part (a) is called the effective yield for an account. How could part (a) be used to determine parts (b) and parts (c)? With a given nominal rate j compounded m times per year, we define the corresponding effective rate to be that rate w which, if compounded annually, is equivalent to the given rate. That is,$\displaystyle
w = \frac{{{\rm{interest-earned-in-one-year}}}}{{{\rm{principal -invested-at-the-beginning-of-the-year}}}}
$In your particular case, if$1 is invested at the rate 10% compounded 12 times per year, then

$\displaystyle w_{{\rm{effective-rate-of-10\%-compounded-monthly}}} = \left( {1 + {\textstyle{{0.10} \over {12}}}} \right)^{12} - 1$

Since you’re seeking to calculate the accumulated value of an annual investment over a period of 20 years, you need to make use of the future value formula of an annuity with w = i, n = 20 years, and R = $1,$100, or $20,000. For the beginning of year deposits/investments, use$\displaystyle
\ddot S = R \cdot \frac{{\left( {1 + i} \right)^n - 1}}{i} \cdot \left( {1 + i} \right)
$For the end of year deposits/investments, use$\displaystyle
S = R \cdot \frac{{\left( {1 + i} \right)^n - 1}}{i}
\$