A customer walks into a Bank with $100,000. He wishes to buy 5 CD's (Cetificates of Deposit) for 5 years as follows:
The questions: a-How much must he deposit in each CD, that ALL 5 CD's will have exactly the same amount at maturity, thereby, effectively receiving 5 equal-amount annuity payments for his initial deposit of $100,000. b- What would the effective annual rate of return on his "annuity" be for the 5 years? Good luck to all.
1-year CD that pays 3% compounded semi-annually. $22,811.55
2-year CD that pays 4% ............................................. $21,711.32
3-year CD that pays 5%.............................................. $20,264.86
4-year CD that pays 6%.............................................. $18,551.93
5-year CD that pays 7%.............................................. $16,660.32
The customer can pocket the other 2c
Yearly 'annuity' = $23,501.03