Martin pays rent of 500 month for the 9 month year He is go

Martin pays rent of $500 / month for the 9 month year. He is going to travel this summer and wont be working. How much must be set aside in his savings account for the 3-month summer to cover his rent for next year? The savings account compounds 3% w/ monthly compounding. Answer = $4411

Solution

Find the present value of 500 per month for 9 months at 3% p.a compounded monthly

Monthly interest rate = 3%/12 = 0.0025

= PV(0.0025, 9 , -500) = $4,444.26

The savings must compound to this amount in 3 months.

Thus savings = 4,444.26/(1.0025)^3 = $4,411