Javier starts a college savings account for his child and places $500 into it every year end, beginning this year. His expected annual return on the account is 2%. He plans to invest for twelve years and then turn over the money to the child for college. The amount he expects to have at the end of the twelve years is closest to:

Question

Quizplus · Accepted Answer

Javier's investment is an example of an ordinary annuity, where payments are made at the end of each period. The future value of an ordinary annuity can be calculated using the formula: FV = P * [(1 + r)^n - 1] / r, where P is the payment amount, r is the annual interest rate, and n is the number of periods. Plugging in the values: P = $500, r = 0.02 (2% expressed as a decimal), and n = 12, we get FV = $500 * [(1 + 0.02)^12 - 1] / 0.02 ≈ $6,706.04.

Javier Starts a College Savings Account for His Child and Places