CD Investment
Suppose that you have $10,000 that you would like to use toward the purchase of a house. The houses that you are interested in buying have an average value of $135,000. In order to purchase a house like this, you would like to make a down payment that is 20% of the value of the house. Since you do not currently have enough money for the down payment, you decide to invest your $10,000, and wait until you have enough money from your investment for the down payment. The best investment that you could find is a CD that pays 4.8% APR compounded quarterly.
How long will it take until you have enough money for the down payment?
We could solve this problem using the compound interest formula from Section 3-2. Instead, we will create an Excel spreadsheet that will track the account balance for each period.
At the top of spreadsheet, set the parameters for this situation: Principle (P) and Annual Interest Rate (r).
Set up the following 4 columns:
Period - Keeps track of the number of compounding periods. Start with Period 0.
Years – Keeps track of the number of years that your money is in the CD.
Interest Earned – Keeps track of how much interest is earned each period.
Account Balance – Keeps track of how much is in your account at the end of each period.
Fill out the spreadsheet until you have enough in the account for a down payment on the house. Calculate the total amount of interest earned, and compare it to the final account balance.
Create a column graph that shows the growing account balance over time until you have enough for the down payment. The horizontal axis should be Years, and the vertical axis should be Account Balance. To do this, you need to click on “Select Data” located in the Design tab of Chart Tools. Be sure to label your graph as well as labeling the horizontal and vertical axis.