Question

Topic: Sinking Fund Factor
[Just need an explanation]

Jim Hayes wants to buy some electronic equipment for $1000. He decided to save a uniform amount at the end of each month so that he would have the required $1000 at the end of one year. The local credit union pays 6% interest, compounded monthly. How much would Jim have to deposit each month?

Answer 1

Solution:
F= $ 1, 000
n= 12
i= 0.5%
A= unknown

A= F ( A/F, i%, n )
A= 1000(0.0811) = $81.10

[Note: ( A/F, 0.5%, 12 ) value came from a compound interest table]

\(\sf My\ Question:\) Why is i=0.5% not 6%?

Answer 2

That's because the questions tells us the interest rate is 6%, which means it's 6% for the whole year, but they say compounded monthly so that means 6%/12 which is 0.5%.

They told us compounded monthly, so it's not 6% per month, it's 6%/12 because there are 12 months in a year.

Answer 3

oh that's it /.-
I must be sleepy now lol
Thank you so much! :D

Answer 4

Hehe. Get some rest! And no worries. :^)

Answer 5

will do, goodnight :)

Answer 6

night, sleep tight