Question

Sara wants to establish a trust fund to provide $75,000 in scholarships each year and earn a fixed 6.15 percent rate of return. How much money must she contribute to the fund assuming that only the interest income is distributed? a) $987,450 b) $1,478,023 c) $1,333,333 d) $1,219,512 e) $1,500,000

Answer 1

To provide yearly scholarships of $75,000 with a 6.15% interest rate, Sara must contribute $1,219,512 to the trust fund.

Step-by-step explanation:

To determine how much Sara must contribute to the trust fund so that it provides $75,000 in scholarships each year at a fixed 6.15% rate of return, we can use the formula for calculating the principal based on simple interest.

The interest formula earned I is I = P × r × t, where P is the principal amount, r is the rate of interest per period, and t is the time the money is invested for.

Since Sara wants to provide scholarships each year, it will be 1 year. We want the interest I to be $75,000 and r to be 6.15%, or 0.0615 when expressed as a decimal.

Using the formula, we can solve for the principal P:

I = P × r × t

75,000 = P × 0.0615 × 1

P = 75,000 / 0.0615

P = 1,219,512

Therefore, the amount that needs to be contributed to the trust fund is $1,219,512.