Question

The formula for compound interest is:

Where:

A = the future value of the investment (including interest)
P = the principal investment amount (the initial deposit amount)
r = the annual interest rate (decimal)
n = the number of times that interest is compounded per year
t = the number of years the money is invested for

If Josh invests $500 in a 5-year fixed interest savings bond that pays 5% per annum, how much will his entire investment be worth at the end of the term?

Answer 1

Future value, A = $642

Explanation:

Given the following data;

Principal = $500

Interest rate = 5% = 5/100 = 0.05

Time, t = 5 years

n = 365

To find the future value, we would use the compound interest formula;

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

Where;

A is the future value.

P is the principal or starting amount.

r is annual interest rate.

n is the number of times the interest is compounded in a year.

t is the number of years for the compound interest.

Substituting into the equation, we have;

`A = 500(1 + (0.05)/(365))^(365*5)`

`A = 500(1 + 0.000137)^(1825)`

`A = 500(1.000137)^(1825)`

`A = 500*1.2840`

Future value, A = $642