Question

Suppose Maria places $5500 in an account that pays 2% interest compound each year. Assume that no withdrawals are made from the account

Follow the instructions below. Do not do any rounding.

Answer 1

After 1 year: $5,610

After 2 years: $5,722.20

Explanation:

Use the formula for periodic compounding interest, which is

A = P(1 + r/n)^(nt), where A is the final amount, P is the initial deposit, r is the interest rate as a decimal, n is the number of times the interest is compounded per year, and t is how many years.

Here, P = 5,500, r = 0.02 (that's 2% as a decimal), n = 1,

t = 1 for the first answer, t = 2 for the second answer (1 year, then for 2 years)

Plug the known values in to solve...

For 1 year...

A = 5,500(1 + 0.02/1)^(1*1)

A = 5,500(1.02)^1

A = 5,610

For 2 years...

A = 5,500(1 + 0.02/1)^(1*2)

A = 5,500(1.02)²

A = 5,722.20