You Want to Buy a New Car in Five Years

question 13

Multiple Choice

You want to buy a new car in five years. You want to have saved $25,000 by then. You can invest $4,000 at the end of each of the next five years at an interest rate of 6% compounded annually. Will you have enough money at the end of the fifth year?

• A) No. You are short $2,452.
• B) Yes. You have $1,532 more than you need.
• C) No. You are short $1,532.
• D) Yes. You have $2,452 more than you need.
• E) None of the answers is correct.

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Definitions:

RSP

Registered Savings Plan, a financial account in Canada designated for holding savings and investment assets, with special tax benefits for retirement savings.

Monthly Compounded

Pertains to interest or any financial metric that is calculated and added to the principal balance every month.

Nominal Rate

The stated interest rate of a bond or loan, not accounting for compounding or inflation effects.

Annually Compounded

An investment or interest calculation method where the interest earned over the year is added to the principal at year-end, affecting the amount earned the following year.