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What is the effective annual interest rate for 10 compounded?

User Polyhedron
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1 Answer

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Final answer:

To have $10,000 in ten years with an annual compound interest rate of 10%, a person would need to deposit approximately $3855.43.

Step-by-step explanation:

To find out how much money needs to be deposited in a bank account with an annual compound interest rate of 10% to have $10,000 in ten years, we use the formula for compound interest:

A = P(1 + rac{r}{n})^{nt}
Where:

  • A is the amount of money accumulated after n years, including interest.
  • 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.
  • t is the time the money is invested for, in years.

Since the interest is compounded annually, n will be 1. The formula simplifies to:

A = P(1 + r)^t
Now, let's solve for P since we want to find the initial deposit that will grow to $10,000:

$10,000 = P(1 + 0.10)^{10}
Thus:

P = rac{$10,000}{(1 + 0.10)^{10}}
Calculating the denominator:

P = rac{$10,000}{(1.10)^{10}}
P = rac{$10,000}{2.59374}
P ≈ $3855.43
You would need to deposit approximately $3855.43 to have $10,000 in ten years at a 10% interest rate compounded annually.

User Elton
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