Use a geometric progression to calculate the value of an investment where 12 monthly payments of £250 are made with a nominal level of interest of 4.8% accrued monthly (to the nearest £1).

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Quizplus · Accepted Answer

The value of the investment can be calculated using the formula for the future value of a geometric series, which in the context of finance is often referred to as the future value of an annuity formula. The formula is: FV = P * [(1 + r)^n - 1] / r, where P is the payment amount, r is the monthly interest rate (annual rate divided by 12), and n is the total number of payments. Given a monthly payment of £250, an annual interest rate of 4.8%, and 12 payments, the monthly interest rate is 0.04 (4.8% annual rate) divided by 12 = 0.004. Plugging these values into the formula gives: FV = 250 * [(1 + 0.004)^12 - 1] / 0.004, which calculates to approximately £3,079 when rounded to the nearest £1.

Use a Geometric Progression to Calculate the Value of an Investment