How much total interest will you earn in 45 years if you deposit $5,000 today into a savings account that earns 4

Finance Sep 01, 2020

How much total interest will you earn in 45 years if you deposit $5,000 today into a savings account that earns 4.25%, compounded monthly? How much of this interest earned is interest on interest?

Expert Solution

First we calculate Future Value using FV Function in Excel:

=fv(rate,nper,pmt,-pv)

Here,

FV = Future Value = ?

Rate = 4.25%/12 = 0.3542% compounded monthly

Nper = 45 years*12 = 540 months

PMT = 0

PV = $5,000

Substituting the values in formula:

=fv(0.3542%,540,0,-5000)

FV or Future Value = $33,735.79

Total Interest = Future Value - Present Value

= $33,735.79 - $5,000

Total Interest = $28,735.79

Simple Interest = $5,000*(4.25%/12)*(45*12) = $9,562.50

Now we calculate Interest on Interest:

Interest on Interest = $28,735.79 - $9,562.50 = $19,173.29

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