Question

Esh deposits $3500 in an account that

earns 3.75% interest each year. After the
first year, Esh has $3631.25 in the account.
After the second year, Esh has $3767.42 in
the account, and after the third year Esh has
$3908.70 in the account.

Answer 1

Compound interest

Explanation:

The question requires us to determine if the interest earned is a simple or compound interest

Simple interest = amount deposited x time x interest rate

Future value with compounding = A( 1 + r)^n

A = amount deposited

r = interest rate

n = time

We would calculate the simple interest and the future value in year 2

Simple interest in year 2 = $3500 x 0.0375 x 2 = 262.50

Future value in 2 years with a simple interest = 262.50 + 3500 = $3762.50

Future value in year 2 with compounding = 3500 x (1.0375)^2 = $3767.42

The value provided in year 2 with compounding matches that provided in the question. Thus, it is compounding of interest that is done