Norman is planning for his retirement. He initially deposits $25,000 in a retirement plan earning 4.4% compounded quarterly over 25 years. Three years later he begins another investment where he contributes $800 per quarter over 22 years. Based on monthly compounding, determine what the rate of interest will be on the final investment if he wishes to end up with $210,000.
A) 5.37%
B) 5.48%
C) 5.59%
D) 5.72%
E) 5.85%

Question

Quizplus · Accepted Answer

The correct answer is determined by calculating the future value of both investments and then solving for the interest rate needed for the second investment to reach the desired total. The first investment grows with the formula for compound interest, and the second investment's future value is calculated using the formula for the future value of an annuity. Subtracting the future value of the first investment from the desired total gives the amount needed from the second investment, from which the interest rate can be solved.

Norman Is Planning for His Retirement