Compound Interest With Repayments problem

In summary, a 30 year old employee earning a starting salary of $20,000 per year contributes 5% of their salary into a superannuation scheme, with the employer also contributing 5%. Assuming the fund compounds at 5% per year, the lump sum payout upon retirement at age 60 will be dependent on the inflation rate and the employee's increasing salary. To calculate the future value of a lump sum investment with compound interest and regular payments, use the formula: FV = P (1+r)^n + PMT [(1+r)^n - 1] / r.
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1. A 30 year old employee on a starting salary of $20 000 per year pays 5% of this into a superannuation scheme to which the employer also contributes 5% of the employee’s salary. If the fund is compounding at 5% p.a., find the lump sum payout when the employee retires at 60.
Note: This solution is a value in current dollars. As the person’s wage increases each year, so will the lump sum amount, and it is therefore tied to the inflation rate.
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2. I have heard that this formula requires compund interest with repayments but am not sure of how to do it
 
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The formula for calculating the future value of a lump sum investment with compound interest and regular payments is: FV = P (1+r)^n + PMT [(1+r)^n - 1] / r, where FV is the future value, P is the initial investment, r is the interest rate, n is the number of compounding periods, and PMT is the regular payment.
 

FAQ: Compound Interest With Repayments problem

What is compound interest with repayments?

Compound interest with repayments is a financial concept where interest is calculated not only on the initial principal amount, but also on the accumulated interest from previous periods. Repayments refer to regularly scheduled payments made towards the principal amount, which can affect the amount of interest accrued.

How is compound interest with repayments different from simple interest?

The main difference between compound interest with repayments and simple interest is that in compound interest, interest is calculated on the initial principal amount as well as the accumulated interest, while in simple interest, interest is only calculated on the principal amount. Additionally, in compound interest with repayments, the interest rate can vary over time, whereas in simple interest, the interest rate remains constant.

What factors affect the total amount paid in compound interest with repayments?

The total amount paid in compound interest with repayments is affected by several factors, including the initial principal amount, the interest rate, the number and frequency of repayments, and the length of the repayment period. Generally, the longer the repayment period, the more interest will accrue and the higher the total amount paid will be.

Can compound interest with repayments be beneficial for borrowers?

Yes, compound interest with repayments can be beneficial for borrowers because it allows them to pay off their debt over time while minimizing the amount of interest paid. By making regular repayments, borrowers can reduce the amount of interest that accrues on their outstanding balance, potentially saving them money in the long run.

How do I calculate compound interest with repayments?

To calculate compound interest with repayments, you will need to know the initial principal amount, the interest rate, and the frequency and amount of repayments. You can use a financial calculator or an online compound interest calculator to determine the total amount paid over the repayment period. Alternatively, you can use a formula to calculate the total amount paid, which takes into account the number of compounding periods and the interest rate.

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