Question

Edgar accumulated $5,000 in credit card debt. If the interest rate is 20% per year and he does not make any payments for 2 years, how much will he owe on this debt in 2 years with monthly compounding?

Round your answer to the nearest cent.
Do NOT round until you calculate the final answer

Correct answer: $7,434.57

Answer 1

amount owed = $7434.57

Explanation:

To solve this problem, we have to use the following formula:

`\boxed{A = P(1 + (r)/(n))^(nt)}`,

where:

• A = final amount

• P = principal (initial) amount

• r = annual interest rate

• n = amount of times the interest is compounded per time period

• t = number of years the money is kept for

In this case, the principal amount, P = $5000 and the money is owed for two years, so t = 2. The annual interest rate, r = 0.20 (20% =
`(20)/(100)` = 0.2). The interest is compounded monthly, which means it is compounded 12 times per year. Therefore, n = 12.

Using the above information and formula, we can calculate the amount owed after 2 years:

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

`= 5000(1 + (0.2)/(12))^(12 * 2)`

`=` $7434.57

Therefore, the amount Edgar owes after 2 years is $7434.57.