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College Investment
$25,000 Investment P= $25,000
r= 2.47%
t= 5 years n=
F (t) = P (1 + r/n) nt
F (t)= $25,000(1 + 2.47%/1)
The total amount of the investment is $28,243.84 after 5 years (maximum amount of time for CD as advertised).
Bank offers Certificates of Deposits for 19, 37 and 59 months (U.S. Bank, 2011). Although this Grandmother would like to save for a child's education and therefore has more than five years, many banks only offer a 5-year product.
If the grandmother invests all $25,000 into the CD at the advertised rate, she will have $28,243.84 at the end of the five-year period. Therefore, the grandmother has made $3,243.84 profit. This is calculated at an interest rate of 2.47%...
If inserted into the formula, p = $25,000, t=5 years and n=1.
According to FinAid.org, the cost of college for a student who begins college in 18 years from now who plans on attending a public University for four years is roughly $228,297 (assuming that college rates continue to increase at the current rate of double the inflation rate and that the student attends a University of average cost) (Fin Aid, 2011).
The grandmother's investment will not cover the cost of college. In fact, it will barely dent the total cost. Because the grandmother will have more than five years to plan for this event, she can reinvest her earnings into another CD, or another investment, at the end of five years if she wishes. It is possible that…
Bibliography
Fin Aid. (2011). FinAid.org. Retrieved April 21, 2011, from FinAid - The smart student's guide to financial aid: http://www.finaid.org/calculators/scripts/costprojector.cgi
U.S. Bank. (2011). U.S. Bank, Fast-app. Retrieved April 21, 2011, from U.S. Bank: https://fastapp.usbank.com/fastapp/FastAppRouter
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