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Novia is investing $2517 in an account compounded monthly. She wants to have $3000 in 3...

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topgun13 | Honors

Posted January 11, 2012 at 3:44 PM via web

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Novia is investing $2517 in an account compounded monthly. She wants to have $3000 in 3 years for a trip to Europe.

What interestrate,to the nearest hundredth of a percent, compounded monthly, does she need?

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justaguide | College Teacher | (Level 2) Distinguished Educator

Posted January 11, 2012 at 3:55 PM (Answer #1)

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Novia's initial investment is $2517 in an account where the interest is compounded monthly.

Her target amount at the end of 3 years is $3000. Let the required interest rate be R% annually. As the interest is compounded monthly, the formula of the amount at the end of 3 years is 2517*(1+r)^t, where t = 12*3 = 36 months and the rate r is R/12.

This gives 3000 = 2517*(1+r)^36

=> (1+r)^36 = 3000/2517

Take the log of both the sides

=> 36*log(1+r) = log(3000/2517)

=> log(1+r) = 2.1177*10^-3

=> 1+r = 10^(2.1177*10^-3)

=> 1+r = 1.00488

=> r = 0.00488

The monthly rate of interest required is 0.49%

=> R = 5.87%

The required annual rate of interest is 5.87%

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