9
QuizMultiple Choice

Annuities

Question 9 • FT GMS AMDM B IC – 72

A friend creates an IRA (Individual retirement account) with an APR of 6.25%. She starts the IRA at the age of 25 and deposits $50 at the end of each month. How much will her IRA contain when she retires at the age of 65?

Answer
A
$106,435.62
B
$106,595.63
C
$106,601.32
D
$106,613.15

Explanation

Because deposits are made at the end of each month, use the future value formula for an ordinary annuity: $50 × [((1 + 0.0625/12)^480 − 1)/(0.0625/12)]. There are 40 × 12 = 480 monthly deposits, and the monthly interest rate is 0.0625/12. The calculation gives about $106,595.63, so the IRA will contain approximately $106,595.63, choice B.

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