Jawad makes semi-annual contributions of $2000 starting on his 27^th birthday.How much will he accumulate in his RRSP by age 60,if RRSP earns 8% compounded semi-annually and no contribution is made on his sixtieth birthday?

Question

Quizplus · Accepted Answer

We can use the formula for the future value of an annuity due:

$FV = R\cdot\frac{(1 + i)^n - 1}{i}\cdot(1 + i)$

where R is the regular payment, i is the interest rate per period, n is the number of periods, and we multiply by (1 + i) at the end to account for the fact that the payments are made at the beginning of each period (semi-annually, in this case).

Jawad's first contribution is made on his 27th birthday, so he will make a total of 67 semi-annual payments (from age 27 to age 59). The regular payment is $2000, and the interest rate per period is 4% (since the 8% annual rate is compounded semi-annually).

$FV = 2000\cdot\frac{(1 + 0.04)^{67} - 1}{0.04}\cdot(1 + 0.04) \approx 640,156$

Therefore, Jawad will accumulate about $640,156 in his RRSP by age 60, if he follows this plan. The best choice is B.

Jawad Makes Semi-Annual Contributions of $2000 Starting on His 27th

Jawad Makes Semi-Annual Contributions of $2000 Starting on His 27^th