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31 votes
31 votes
Can someone please explain this to me?

Can someone please explain this to me?-example-1
Can someone please explain this to me?-example-1
Can someone please explain this to me?-example-2
User Lee Grissom
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2.9k points

1 Answer

14 votes
14 votes

Explanation:

there are some tricks involved that your teacher tries to "play" with you.

overall, the question is, how much money is in the account after 2 years, when the originated deposit amount was $15,000, and its interest rate is 8% per year (!). and the interest is compounded (applied) quarterly (= 4 times a year).

the table tells us the multiplication factor FVIF for the original deposit to calculate the balance after n "applications" of the interest rate i.

in other words :

new balance = deposit × FVIF(i, n)

and the paid interest is simply

interest = new balance - deposit =

= deposit × (FVIF(i, n) - 1)

now, the tricks here are :

2 years quarterly means 2×4 = 8 interest application periods.

interest rate = 8% per year = 8/4 = 2% per quarter (interest application period).

so, we have to look in the table for the entry at

8 periods at 2% = 1.1717

the amount (balance) after 2 years is then

15,000 × 1.1717 = $17,575.50

the interest earned is then

17,575.50 - 15,000 = $2,575.50

User Sebastian Nowak
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3.0k points