Asked by Nathaniel Newstrom - Student on May 16, 2024
Verified
You intend to accumulate $100,000 in 10 years instead of 20 years by making equal monthly investment contributions. Will the monthly contribution for a 10-year plan be: (i) Twice the monthly contribution for a 20-year plan? (ii) Less than twice the monthly contributions? or (iii) More than twice the monthly contributions? Assume the same rate of return in both cases. Give the reasoning for your choice.
Equal Monthly Contributions
Regular, identical payments made monthly towards a financial obligation or investment.
Rate of Return
The gain or loss on an investment over a specified period, expressed as a percentage of the investment’s cost.
Investment Contributions
Money that individuals or entities provide toward investment vehicles for the purpose of accumulation and growth.
- Comprehend and utilize the fundamentals of compound interest and its effects on savings and loans.
- Assess the impact of various compounding intervals (such as monthly, quarterly, or yearly) on the growth or reduction of financial assets.
Verified Answer
MB
Meghan BryantMay 19, 2024
Final Answer :
On average, each invested dollar will earn more on a 20-year investment plan than on a 10-year plan. Therefore, more total principal must be invested on the 10-year plan to compensate for the smaller earnings/dollar. Consequently, the monthly investments must be (iii) more than twice as large as on the 20-year plan.
Learning Objectives
- Comprehend and utilize the fundamentals of compound interest and its effects on savings and loans.
- Assess the impact of various compounding intervals (such as monthly, quarterly, or yearly) on the growth or reduction of financial assets.