Question

Phillip deposited $7,775 into a savings account 14 years ago. the account has an interest rate of 4.5% and the balance is currently $14,398.87. how often does the interest compound?

Answer 1

The future amount of an investment with compound interest can be calculated through the equation,

F = P x (1 + ieff)^n

where F is the future amount, P is the current value of the money, ieff is the effective interest (rate per year), and n is the number of years.

From the equation, all are given except for the effective interest, i. Now, substituting the known values,
14,398.87 = (7,775) x (1 + ieff)^14

The value of ieff from the equation is 0.044999.

Since the value of the ieff when translated to percentage is equal to 4.5% as well, the interest rate is compounded yearly.