Question

Lorena is investing a $5000 inheritance from her aunt in a certificate of deposit that matures in 4 years. The interest rate is 6.25% compounded quarterly. What is the balance of the account after 4 years?

$5,078.13
$5,319.90
$5,321.82
$6,407.73

Answer 1

$6407.73

Explanation:

Use the compound amount formula: A = P(1 + r/n)^(n*t), where

P is the original amount (the principal), r is the interest rate as a decimal fraction, n is the number of times the interest is compounded per year, and t is the number of years.

In this case, P = $5000, r = 0.0625, n = 4 and t = 4. Thus,

A = $5000(1 + 0.0625/4)^(4*4), or

A = $5000(1.015625)^16 = $5000(1.2815) = $6407.73 (to the nearest cent)