Question

Question 1

Indicate the answer choice that best completes the statement or answers the question.
FINANCE Determine the amount of money in a savings account that provides an annual rate of 4% compounded monthly if the initial deposit is
$1000 and the money is left in the account for 5 years.
Oa $221.00
O b. S1221.00
Oc. $1490.00
Od $1000.00

Answer 1

Correct choice: b. $1221.00

Explanation:

Compound Interest

It occurs when the interest is reinvested on each compounding period. When it happens interest in the next period is then earned on the principal sum plus previously accumulated interest.

The formula is:

`{\displaystyle A=P\left(1+{\frac {r}{n}}\right)^(nt)}`

Where:

A = final amount

P = initial principal balance

r = interest rate

n = number of times interest applied per time period

t = number of time periods elapsed

The initial deposit on a savings account is P = $1000. The account provides an annual rate of r = 4% = 0.04 compounded monthly. The value of n is 12 since there are 12 months in a year. The money is left in the account for t=5 years. Substituting the values:

`{\displaystyle A=\$1000\left(1+{\frac {0.04}{12}}\right)^(12*5)}`

`{\displaystyle A=\$1000\left(1.00333}\right)^(60)}`

A = $1221

Correct choice: b. $1221.00