February 24th, 2015, 02:52 PM  #1 
Newbie Joined: Feb 2015 From: Sylmar Posts: 5 Thanks: 0  Power of compounding
a. You borrowed \$1,000 from a loan shark at 5% monthly interest. How much do you owe four years later? b. You are trying to build a nest egg for your retirement. You have estimated that you will need income of \$5,000 a month in order to live comfortably after retirement. How large a nest egg (principal P_{0}) must you have at retirement? Assume that at your retirement you put that money, P_{0}, in an annuity with a guaranteed annual return of 8%. And suppose you think you will live forever. c. You are now 25 and plan to retire at age 65. You want to start saving so that you can build a nest egg of \$1 million. How much should you save each month? Assume that your savings will be earning 10% interest each year, compounded monthly. Last edited by skipjack; February 24th, 2015 at 05:37 PM. 
February 24th, 2015, 06:05 PM  #2 
Global Moderator Joined: Dec 2006 Posts: 18,243 Thanks: 1439 
(a). \$1,000 × $1.05^{48}$ = \$10,401.27 approximately. The amount owed will be slightly higher if the monthly interest is always rounded to the nearest \$0.01, and slightly lower if the monthly interest is always rounded down.


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