SOLUTION: You invest 4000 dollars today in a 5 year certificate of deposit at 4%. What is worth a maturity? I dont understand what he is asking when he says what is worth a maturity.

Question 486033: You invest 4000 dollars today in a 5 year certificate of deposit at 4%. What is worth a maturity?
I dont understand what he is asking when he says what is worth a maturity.
4000 X 1.217 = 4,868 which i think is what it would mature to after 5 years but it does not seem like that is what he is asking. I calculated the maturity by using a time value of money table.
Can u help me?
Answer by bucky(2189) (Show Source): You can put this solution on YOUR website!
You have a minor difference because of rounding differences. Rather than use a table, you can use the following equation:
.

.
Where the letters represent the following:
.
P is the future value of an investment
C is the amount of money that you start with in the investment
R is the annual rate of interest in decimal form (example: 6% is entered as 0.06)
N is the number of times per year that the interest will be compounded
T equals the number of years into the future that the investment will be determined
.
For this problem you are going to determine P. The money to be invested C is $4,000. The interest rate R is 0.04 annually. The interest will be applied only once per year at the end of the year so N = 1. And finally, the investment period T is 5 years. Substituting these values into the equation gives:
.

.
Simplifying the terms in parentheses results in:
.

.
and adding the 1 + 0.04 in the parentheses gives:
.

.
Using a calculator to determine 1.04 raised to the 5th power simplifies the equation to:
.

.
and multiplying out the right side of this equation gives you the answer:
.

.
When you round to the nearest cent the answer becomes $4866.61
.
That's all there is to this problem. But in the way of further explanation, a Certificate of Deposit (or CD for short) is a contract that if you deposit money for a specified period of time it will pay you a guaranteed annual rate of interest for the entire period. (It will also tell you how many times the year the annual rate of interest is to be compounded during each year.) Finally it specifies how long in terms of years or fractions of years the money plus any interest that is paid is to remain invested. At the end of the time that the money is to be invested the Certificate of Deposit expires (or is said to reach maturity) and at that time the investor will be paid the original amount invested plus any interest that it has earned. For this problem the CD matured at the end of the fifth year.
.
Hope this helps you to build your confidence about what you are doing. You understood the meaning of the problem and you went about solving it correctly. Congratulations and keep up the good work!!!!

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