Multiple compounding periods (FV): Your brother has asked you to help him with choosing an investment. He has $5,000 to invest today for a period of two years. You identify a bank CD that pays an interest rate of 4.25 percent with the interest being paid quarterly. What will be the value of the investment in two years?

Question

Quizplus · Accepted Answer

To calculate the future value (FV) of the investment, we can use the formula:

FV = PV x (1 + r/n)^(n x t)

Where:
PV = Present value = $5,000
r = Interest rate per year = 4.25%
n = Number of compounding periods per year = 4 (quarterly)
t = Number of years = 2

Plugging in the values, we get:

FV = $5,000 x (1 + 0.0425/4)^(4 x 2)
FV = $5,441.08

Therefore, the investment will be worth $5,441.08 in two years. Option B is the correct answer.

Multiple Compounding Periods (FV): Your Brother Has Asked You to Help