Question

Interest-on-Interest Consider a $1,500 deposit earning 4 percent interest per year for 7 years. How much total interest is earned on the original deposit (excluding interest earned on interest)?

Answer 1

Interest earned = $420

Step-by-step explanation:

The total worth of the investment after the the investment period compounded at certain rate is called the Future Value.

Future Value= Principal + compounded interest i.e

FV = P × (1+r)^n

r- rate, FV- future value , n- period

FV = ? , P -1,500, r- 4%, n-7 years

FV = 1,500 ×1.04^(7)

FV = 1973.897669

Interest earned (compound intrest) = FV - Principal amount

= 1973.897669 - 1,500

= $473.89

Without interest earning interest.

The amount of interest earned will be computed on the principal only

Interest earned = $1,500× 4%× 7

= $420