Question

If someone deposits $2,500 today in a savings account that earns a rate of interest of 5% per year, how much money would that person have in their savings account six years from today?

a. $3,250
b. $3,350
c. $15,750
d. $2,625

Answer 1

It accounts for compound interest, and after six years at a 5% interest rate, the initial deposit of $2,500 grows to $15,750. The correct answer is (c) $15,750.

Step-by-step explanation:

The future value of a deposit with compound interest can be calculated using the compound interest formula:

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

Where:

• FV is the future value of the investment/loan, including interest.
• P is the principal amount (the initial deposit or loan amount).
• r is the annual interest rate (as a decimal).
• n is the number of times that interest is compounded per unit t.
• t is the time the money is invested/borrowed for in years.

In this scenario:

• P = $2,500
• r = 5% = 0.05
• n = 1 (compounded annually)
• t = 6 years

Plugging in these values:

FV = $2,500 * (1 + 0.05/1)^ 1*6 = $2,500 * (1.05)^6

Calculating this gives us the future value after six years, which is $15,750. Therefore, the correct answer is (c) $15,750.