Howard is saving for a long holiday. He deposits a fixed amount every month in a bank account with an EAR of 7.5%. If this account pays interest every month then how much should he save from each monthly wage in order to have $10,000 in the account in two years' time?

Question

Quizplus · Accepted Answer

The correct answer is A.The future value of an annuity is given by the formula:FV = PMT * (((1 + r)^n - 1) / r)where:PMT is the monthly paymentr is the monthly interest rate (EAR / 12)n is the number of monthsIn this case, we have:FV = $10,000r = 7.5% / 12 = 0.00625n = 2 * 12 = 24Substituting these values into the formula, we get:$10,000 = PMT * (((1 + 0.00625)^24 - 1) / 0.00625)Solving for PMT, we get:PMT = $388.06Therefore, Howard should save $388 from each monthly wage in order to have $10,000 in the account in two years' time.

Howard Is Saving for a Long Holiday