Question

Gwen has $4,500 she would like to leave in a certificate of deposit (CD) while she is studying at a university. The bank is offering a rate of 2 percent on CDs. Use the Future Value Table in Figure 5-5 to help calculate the amount of interest she would earn if she put this amount in a CD for 4 years at an annual interest rate of 2 percent.

Answer 1

Gwen would earn approximately $370.94 in interest over 4 years on her $4,500 CD investment at an annual interest rate of 2%, calculated using the compound interest formula.

Step-by-step explanation:

Gwen wants to calculate the future value of her $4,500 Certificate of Deposit (CD) after 4 years with an annual interest rate of 2%. To find the future value using a Future Value Table, we'd typically look up the factor for 4 years at 2% and multiply it by the principal amount. However, without the future value factor table provided, we can compute the future value using the compound interest formula:

Future Value = P (1 + r)^n

Where P is the principal ($4,500), r is the annual interest rate (0.02), and n is the number of years (4).

Future Value = $4,500 (1 + 0.02)^4

The calculation gives us a future value of approximately:

Future Value = $4,500 (1.08243216)

Future Value ≈ $4,870.94

The interest earned over the 4 years is the future value minus the principal:

Interest Earned = Future Value - Principal

Interest Earned ≈ $4,870.94 - $4,500

Interest Earned ≈ $370.94

Gwen would earn approximately $370.94 in interest over 4 years on her CD investment.