Question

You deposit $2,500 in a special savings account. The account earns interest at a rate of 3.25% compounded monthly.

a. What amount will be in your account at the end of 5 months is no other deposits or withdrawals are made?
b. What is the compound interest?

Answer 1

Step-by-step explanation:

a.)

Amount deposited ; PV = 2,500

Monthly interest rate; r = 3.25% / 12 = 0.2708% or 0.002708 as a decimal

Duration of investment ; n = 5 months

Use future value formula to find the accumulated amount by the end of the 5th month;

FV = PV *(1+r)^n

= 2,500* (1.002708)^5

= 2,500 * 1.01361

= 2,534.025

Therefore, the account will have $2,534.03

b.)

Compound interest is the interest earned on the initial amount deposited(Principal) and on the accumulated interest already earned.

The compound interest is therefore total future value minus the initial amount invested;

= $2,534.03 - 2,500

= $34.03