Title: 13-3 How Fast Does Your Money Grow

13-3 How Fast Does Your Money Grow?

Barry learned in an online investment course that he should start investigating as soon as

possible. He had always thought that it would be smart to start investigating after he finishes

college and when his salary is high enough to pay the bills and to have money left over. He

projects that will be 5-10 years from now. Barry wants to compare the difference between

investing now and investing later. A financial advisor who spoke to Barry suggested that a Roth

IRA (Individual Retirement Account) would be a good investment for him to start.

(Note: When table values do not include the information you need, use the formula FV=

$1 (1+r) N where R is the period rate and N is the number of periods)

1) If Barry purchases a 2,000 Roth IRA when he is 25 years old and expects to earn an

average of 6 % per year compounded annually over 35 years (until he is 60), how

much will he accumulate in the investment?

Using the formula FV=PV (1+r) n

FV= future value

PV= present value = $2000

R= Rate of interest = 6% = 6/100= 0.06

N= Number of years= 35

FV=2000 (1 + 0.06)35

FV= 2000 (1.06)35

FV= 2000 (7.68608)

FV= 15372.17 = 15372

So the accumulated interest amount 15372- 2000= $13372

2) If Barry doesnt put the money in the IRA until he 35 years old, how much money

will accumulate in the account by the time he is 60 years old using the same return of

6 %? How much less will he earn because he invested 10 years later?

FV= future value

PV= present value = $2000

R= Rate of interest = 6% = 6/100= 0.06

N= Number of years= 35

FV=2000 (1 + 0.06)35

FV= 2000 (1.06)35

FV= 2000 (7.68608)

FV= 15372.17 = 15372

So the accumulated interest amount 15372- 2000= $13372

Now if n=25 years

FV= 200 (1.06)25

FV= 2000 (4.29187)

FV= 8583.74 = $8584

And the accumulated interest for 25 years is 8584-2000= $6584and the interest

earned difference for 35 years and 25 years is 13372- 6584= $6788 for a period of 10

years.

3) Barry knows that the interest rate is critical to the speed at which your investment

grows. For instance, if $1 is invested at 2% compounded annually, it takes

 approximately 34.9 years to double. If $1 is invested at 5% compounded annually, it

takes approximately 14.2 years to double. Use table 13-1 to determine how many

years it takes $1 to double if invested at 10% compounded annually; at 12%

compounded annually.

A=P (1+i/n)nt -> 2 = 1 (1+0.1/1)1*t

-> 2 = (1.1)t

-> log10 2 = t* log10 (1.1)

-> t = log10 2 / log10 (1.1) = 7.3 years

4) At what interest rate would you need to invest to have your money double in 10 years

if it is compounded annually?

$200=$100(1+R)10

$200(/100) = (1+R) 10

$2= (1+R) 10

2 1/10= 1+R%

2 0.1=1+R%

1.07177=1+R%

R%= 0.07177

R%= 7.18%

So, the rate of interest at which the investment doubles itself in 10 years is 7.18%