Question

Larry invests $100 in a savings plan. The plan pays 4 1/2 % interest each year on his $100 account balance.

a. How much money will Larry earn in interest after 3 years? After 5 years?

Answer 1

$14.12 (after 3 years) and $24.62 (after 5 years)

Explanation:

Use the compound amount formula (assuming annual compounding):

A = P(1 + r)^t

Here A = $100(1 + 0.045)^3 (after 3 years)

= $100(1.045)^3 = $114.12.

The interest earned (alone) would be $14.12.

After 5 years:

Here A = $100(1 + 0.045)^5 (after 5 years)

= $100(1.045)^5 = $124.62

The interest earned (alone) would be $24.62.