Quants 1 - Annuity Question

[Dipti Mathur]

I have a question on annuity:

A person places $500 per month in a tax deferred retirement account and expects 7% annualised return for 25 years. How much will the person expect to have accumulated after 25 years?

Now when I calculate the accumulated amount after 25 years based on dividing interest by 12 compounding period and consider 25 years as 300 month I get a correct answer which is $405033.

But when I convert $500 per month to $6000 per year and leave the other variables constant like 7% per year and N = 25 � I get a different answer.

Can somebody tell me why is there a difference? I think the difference is because the interest rate varies if it is charged monthly compared to annually but then a follow up question is which one of the above method should be used to calculate the problem and why?

 

[JoeyDVivre]

C'mon - just think about it. Putting in $6000 per year at 1 pt in the year gives a different amount of interest on all but 1 day than putting in $500 12 times.

 

[June07_guy]

The question will tell you whether to use annual compounding or monthly. This question asks for monthly.
Guy

 

[Dipti Mathur]

Thanks for clarifying this.