The question is as follows:

$30,000 is invested at the start of each year for the next 20 years. The money invested earns interest at an annual effective rate of 4%. The interest earns interest at an effective rate of 2% a year. If all interest payments are made at the end of the year, find the value of the investment at the end of 20 years.

I'm confused as to how to account for the interest earned each year earning new interest at a different rate (2%) than the account (4%).

I've done problems involving removing & reinvesting interest earned on an account, where you treat the interest earned yearly as a separate account, but I don't see how that can be applied here.


I was being stupid in that first post. The 30,000 only is added to. The interest is an increasing annuity. So your two calculations are:$$30,000*20=600,000$$ and$$30,000(.04)(Is)\overline{20}|2%=286,800$$So the total accumaulted amount is $$600,000+286,800=$886,800$$

  • $\begingroup$ Should've included the answer, sorry about that.. But the answer according to the book is actually $886,999.03. $\endgroup$ – user377161 Oct 10 '16 at 22:54

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.