msrayana Posts: 1, Reputation: 1 New Member #1 Jul 7, 2008, 04:45 PM
Certificate of deposit
You need \$28,974 at the end of nine years, and your only investment outlet is an 8 percent long-term certificate of deposit (compounded annually). With the certificate of deposit, you make an initial investment at the beginning of the first year.

a. What single payment could be made at the beginning of the first year to achieve this objective?
b. What amount could you pay at the end of each year annually for 10 years to achieve this same objective?

Can someone help leading in the right direction
 greg young Posts: 3, Reputation: 1 New Member #2 Jul 7, 2008, 05:25 PM
Check in with a seasoned banker(preferably at a main office) who would be happy to help
Considering his bank sells CDs. He should have tables to answer your question as I
Was in a related business some time ago and know they are commenly used. Good Luck
 morgaine300 Posts: 6,561, Reputation: 276 Uber Member #3 Jul 7, 2008, 11:04 PM
Greg, this is homework. :-) I don't think the bank's going to help. (But if a bank could tell me where to find a CD at 8%, I'd be really happy.)

When something says a "single payment," it's a lump sum payment. i.e. NOT an annuity.

An annuity is when you have a series of payments. i.e. a lump sum earns interest, which makes it grow. But an annuity not only earns the interest, but you add an amount to it every such-and-such period. (It can also be when payments reduce something, but that doesn't apply here.) So the "at the end of every.... " is a clue that it's an annuity, because it's happening again and again, and not just a lump sum.

Then you have to deal with whether you are solving for a future value or a present value. Part of the trick here is that it's going to change based on (a) and (b), so let's see if I can explain it without doing it for you.

When you have a lump sum, the one you're solving for is the one you don't have. A lump sum has one present value and one future value. So you're looking for which one you're solving for. Is that 28,974 a present or a future? And therefore, which one are you solving for?

When it's an annuity, you need to compare to when the payments are. i.e. did the amount come first and payments are being removed from it, like a car loan would be -- that's a present value with payments coming off it. Or are the payments growing into some amount in the future -- that's a future value with payments going into it. With an annuity, you are not comparing present to future -- you're comparing to when the payments are. So again, is that 28,974 before the payments (present) or after the payments (future)? Except in this case you're solving for the payments themselves, but you still need to know if it's present or future.

Now, as to actually working it out, it's gotten so everyone uses different methods to do this and I'm not going to explain all 4 methods I know of w/out knowing what you need. i.e. have you been using charts, a financial calculator, etc?

Why don't you see what you can do with this. Then you can come back with anything you've figured out and any other questions. And if I know the method you're using to do the calculating, I can help with that part too. (Unless it's Excel cause I never do them that way, but I can tell you if the answer's correct.)

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