Question

You are considering investing in a European bank account that pays a nominal annual rate of 18%, compounded monthly.

If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000?

a. 23

b. 27

c. 32

d. 38

e. 44

Answer 1

Answer:

d. 38

Explanation:

This is an Annuity Due type of question. You get the hint from the statement "....$5,000 at the beginning of each month," In an Annuity due , the recurring payments occur at the beginning of the period i.e annually, quarterly or (monthly in this case)

So using a financial calculator on "BGN" mode

nominal rate of 18% is the I/Y. However, since it is monthly compounded, convert it to a monthly rate.

I/Y = 18%/12 = 1.5%

PMT; recurring cashflow = -5,000

FV; future value = 250,000

PV ;present value = 0 (note: in annuity, use 0 for the variable not given)

then CPT N = 37.16

Therefore, it will take approximately 38 months