A local bank will pay you $299 at the end of each year for your lifetime if you deposit $4,600 in the bank today. If you plan to live forever, what interest rate is the bank paying?

A local bank will pay you $299 at the end of each year for your lifetime if you deposit $4,600 in the bank today. If you plan to live forever, what interest rate is the bank paying?

Answer

PV	=	C / r
r	=	C / PV
	=	$299 / $4,600
	=	0.0650, or 6.50%

I now have $10,000 in the bank earning interest of 1.00% per month. I need $20,000 to make a down payment on a house. I can save an additional $100 per month. How long will it take me to accumulate the $20,000?

Answer

Some values below may show as rounded for display purposes, though unrounded numbers should be used for actual calculations.

FV	=	PV × (1 + r)t + {[C × (1 + r)t – 1] / r}
$20,000	=	$10,000 × 1.0100t + $100 × [(1.0100t – 1) / .0100]

To solve for t, use a financial calculator or computer.

Calculator computations:

Enter

1.00

–10,000

–100

20,000

N

I/Y

PV

PMT

FV

Solve for

40.75

Since the interest rate and payment are in months, the time period must also be in months. Thus, it will take you 40.75 months to accumulate the down payment.