Question

Part of Abernathy’s divorce settlement involves setting aside money today for college tuition for their daughter who enters college in 10 years. They estimate that the cost of four years’ tuition and fees at the state university their daughter will attend will be $40,000. Find the amount of interest earned at 4% interest compounded semiannually

Answer 1

We would apply the formula for calculating compound interest which is expressed as

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

where

A is the toatl amount after t years

t is the number of years

P is the principal or initial amount invested

n is the number of compouding periods in a year

From the information given,

P = 40000

r = 4% = 4/100 = 0.04

n = 2 because it was compounded twice in a year

t = 10

By substituting these values into the formula,

A = 40000(1 + 0.04/2)^2 x 10

A = 40000(1.02)^20

A = 59438

Interest = total amount - principal

interest = 59438 - 40000

interest = $19438