Final answer:
To calculate the value of a 5-year CD worth $1,000 at a 2% annual interest rate, compounded annually, use the compound interest formula, which yields a final value of $1,104.08 at the end of five years.
Step-by-step explanation:
The question concerns the calculation of the future value of a Certificate of Deposit (CD) given a certain interest rate and compounding period. For instance, if you open a 5-year CD for $1,000 that pays 2% interest, compounded annually, you can calculate the value of that CD at the end of five years using the compound interest formula.
The formula to calculate the future value of a CD is A = P(1 + r/n)^(nt), where, P is the principal amount (the initial amount of money), r is the annual interest rate (decimal), n is the number of times that interest is compounded per year, and t is the time the money is invested for in years.
In the given example, P would be $1,000, r would be 0.02 (2% expressed as a decimal), n would be 1 (since it is compounded annually), and t would be 5 years. Using the formula:
A = $1,000(1 + 0.02/1)^(1*5) = $1,000(1 + 0.02)^5
A = $1,000(1.10408)
A = $1,104.08
Therefore, the value of the CD at the end of the five years would be $1,104.08.