Question

Michael's parents think he is the smartest baby ever born. They decide to place $18,000 into a college fund account for him when he is born. They are receiving a 4% interest compounded quarterly. At the end of 18 years, how much money will Michael have in his college account?

A. $37,847.79
B. $23,445.29
C. $36,464.70
D. $18,730.88

Answer 1

Explanation:

Initial amount deposited into the account is $18,000 This means that the principal is

P = 18000

It was compounded quarterly. This means that it was compounded 4 times in a year. So

n = 4

The rate at which the principal was compounded is 4%. So

r = 4/100 = 0.04

It was compounded for just 18 years. So

t = 18

The formula for compound interest is

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

A = total amount in the account at the end of t years. Therefore

A = 18000(1+0.04/4)^4 × 18

A = 18000(1.01)^72 = $36847.79