In Chapter 1 of the text we looked at calculating a monthly payment for a loan. A related formula is to calculate the amount accruing when regular payments are made into an interest bearing account – often called the Savings Plan formula.
(A is the accrued amount after t years of making regular payments, PMT, into an account at interest rate, r%, compounded ntimes each year.)
A(t) = PMT·((1 + r/N)N·t – 1)/(r/N)
= PMT*((1 + r/N)^(N*t) – 1)/(r/N)
The second version is essentially in the form used in Excel
Suppose you want to buy a car and have decided that you can save $100 a month. Using information from an internet source, determine the current interest rate on savings accounts and use the information to answer the following:
- How much money will you have saved in a year’s time?
- How much will be interest?
- Why wouldn’t a linear model work here?