Question

Suppose you have 3000 to invest in a 5 year CD that pays 2% interest. If the interest is compounded quarterly, how much will the CD be worth at the end of the 5 year term

Answer 1

3314.68

Explanation:

3000 dollars is invested in a 5 year CD that pays 2% interest annually.

If the interest is compounded quarterly then the quarterly interest rate is
`(2)/(4) = 0.5`% and 5 years is equivalent to (5 × 4) = 20 quarters.

Therefore, the sum will become after 5 years

`3000(1 + (0.5)/(100) )^(20) = 3314.68` dollars.

Hence, the CD will be worth 3314.68 at the end of the 5-year term. (Answer)

Since we know the formula of compound interest as

`A = P(1 + (r)/(100 * n) )^(nt)`

Where A is the final amount that the sum becomes.

P is the principal amount that was invested initially.

r = Annual rate of compound interest.

And n = number of times in a year the principal is compounded.