Question

Ted has always had difficulty saving money, so on June 1, Ted enrolls in a Christmas savings program at his local bank and deposits $750. That money is totally locked away until December 1 so that Ted can be certain that he will still have it once the holiday shopping season begins. Suppose that the annual rate of interest is 10 percent on ordinary savings accounts (that allow depositors to withdraw their money at any time). How much interest is Ted giving up by precommitting his money into the Christmas savings account for six months instead of depositing it into an ordinary savings account? (Hint: If you invest X dollars at an annual interest rate of Y percent, you will receive interest equal to X × Y, where the interest rate Y is expressed as a decimal.)

Answer 1

$37.5

Explanation:

`1) lets use the interest formula:

I=PRT

where i=interest

p=principal(starting amount of $750)

r=rate(10%, but we need to convert it into decimal form so 0.10)

t=time(6 months but we need to take it in terms of year so 0.5 years)

lets substitute the above values into the formula:

i=750*0.10*0.5

i=37.5

Ted is giving up $37.5