Question

Today, you deposit $2,500 of cash in a savings account that earns 8.0% in annualized interest. One interest payment is received at the end of every year. You make no other deposits or withdrawals. In five years, the amount of interest on interest you have earned in your savings account is closest to:

Answer 1

$1,172 in interest

Step-by-step explanation:

To find the answer to this question, we use the future value of an investment formula:

FV = PV (1 + i)^n

Where:

FV = Future value of the investment

PV = Present value of the investment (in this case, the $2,500)

i = interest rate (in this case 8.0%)

n = number of compounding periods (in this case, 5 years)

We now plug the amounts into the formula:

FV = 2,500 (1 + 0.08)^5

FV = 2,500 (1.469)

FV = 3,672

So, after 5 years, the initial $2,500 will have transformed into $3,672. The difference between this two values is the interest earned.

3,672 - 2,500 = $1,172

After 5 years, you will have earned $1,172 in interest