Question

Hannah invested $4,000 in a savings account that earned 2% interest compound quarterly.She determined that if she dose not withdraw or deposit any more money,the value of the account at the end of 3 years will be $4,244.83.What error did Hannah make in her calculations? What will the account balance be after 3 years?Explain.

Answer 1

Her account balance after 3 years is $4,246.71

Explanation:

In this question, we are tasked with calculating what Hannah's account balance will be after 3 years and the error she made in her calculations

Mathematically, to calculate the account balance after 3 years, we use the formula for the compound interest as follows.

Mathematically, the amount A earned on a compound interest is calculated as

A = P

where A is the account balance after the number of years which is what we want to know

P is the initial amount invested which is $4000

r is the interest rate which is 2%(2/100 = 0.02) according to the question

n is the number of times interest is compounded per year which is 4(quarterly means every 3 months)

t is the number of years which is 3

We plug the values into the question;

A = 4000(1 + 0.02/4)^(3)(4)

A = 4000(1+0.005)^12

A = 4000(1.005)^12

A = $4,246.71

P.S ; I do not see Hannah's calculation and as such I cannot spot where she made the error in her calculations

Answer 2

Hannah made an error in her calculations by using simple interest instead of compound interest. To find the balance of a savings account with compound interest, you need to take into account the effect of compounding, where the interest earned is added to the principal and then earns interest as well.

To calculate the actual balance of the account after 3 years, we need to use the formula for compound interest:

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

where:

A = the ending balance of the account

P = the principal amount (the initial investment)

r = the annual interest rate (as a decimal)

n = the number of times the interest is compounded per year

t = the number of years the money is invested

In this case, we have:

P = $4,000

r = 2% = 0.02

n = 4 (since interest is compounded quarterly)

t = 3

Plugging in these values, we get:

A = $4,000(1 + 0.02/4)^(4*3) = $4,493.72

Therefore, the actual balance of the account after 3 years with compound interest is $4,493.72.

Hannah's calculation of $4,244.83 was based on using the formula for simple interest, which only takes into account the initial investment and the annual interest rate, but not the effect of compounding.