Question

An account with an initial balance of $3500 earns interest that is compounded annually. If no other deposits or withdrawals are made, the account will have a balance of $4390.40 after 2 years.

Answer 1

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

Where:

A = the final amount

P = the initial balance

r = the annual interest rate (as a decimal)

n = the number of times the interest is compounded per year

t = the number of years

We know that P = $3500, A = $4390.40, r = unknown, n = 1 (compounded annually), and t = 2. Plugging in these values and solving for r:

$4390.40 = $3500(1 + r/1)^(1*2)

$4390.40/$3500 = (1 + r)^2

1.2544 = (1 + r)^2

√1.2544 = 1 + r

1.12 = 1 + r

r = 0.12 or 12%

Therefore, the annual interest rate is 12%.