Expert: Steve Holleran - 5/4/2007

Question
use this formula:
FV= PMT [(1+i)^n - 1)/i]
i=r/m, where r is the annual rate and m is frequency of compounding or number of payments per year

1) recently, Guaranty Income Life offered an annuity that pays 6.65% compounded monthly. if $500 is deposited into this annuity every month, how much is in the account after 10 years? how much of this is interest?

2) in order to accumulate enough money for a down payment on a house, a couple deposits $300 per month into an account paying 6% compounded monthly. if payments are made at the end of each period, how much money will be in the account in 5 years?

Answer
Hi Amy,

I'm assuming the "n" in the formula is the total number of compoundings which are taking place.  If so, then I think you should get:

1)  FV = 500 * [(1 + .0665/12)^120 -1] / (.0665/12)

      = 84,895

   Since you put in $500 * 120 = $60,000, then
   the interest is $84,895 - $60,000 = $24,895.

2)  Here we have

   FV = 300 * [(1 + .06/12)^60 - 1] / (.06/12)

      = $20,931


Hope this is what you were after.

Steve Holleran