This afternoon, you deposited $1,000 into a retirement savings account. The account will compound interest at 6 percent annually. You will not withdraw any principal or interest until you retire in 40 years. Which one of the following statements is correct?
A) The interest you earn in Year 6 will equal the interest you earn in Year 10.
B) The interest amount you earn will double in value every year.
C) The total amount of interest you will earn will equal $1,000 × .06 × 40.
D) The present value of this investment is equal to $1,000.
E) The future value of this amount is equal to $1,000 × (1 + 40).⁰⁶.

Question

Quizplus · Accepted Answer

The present value of an investment refers to the current worth of a future sum of money or stream of cash flows given a specified rate of return. In this case, the present value of the investment is indeed equal to the amount deposited today, which is $1,000. The other options are incorrect because they either misunderstand how compound interest works (A, B, C) or misapply the formula for future value calculation (E).

This Afternoon, You Deposited $1,000 into a Retirement Savings Account