Question

If $125 is invested at an interest rate of 18% per year and is compounded continuously, how much will the investment be worth in 2 years?

Use the continuous compound interest formula A = Per
$123

Answer 1

$174.05

Explanation:

To find the value of the investment at a later date:

`x * multiplier^n = y`

Here,
`x` is the original amount,
`n` is the number of times the amount compounds and
`y` is the new value.

Let's find the multiplier. Imagine the $125 to be 100%, because that is the full amount of the investment. If you add 18% onto 100%, the result is 118%.

To convert this into a multiplier, you simply divide by 100:

118 ÷ 100 = 1.18

The original amount
`x` in this case is equal to $125, so we can easily substitute that into the equation. We know our multiplier is 1.18. And here, the investment is compounded once per year, and this is over a two year period, meaning the original amount will be compounded twice overall. Therefore,
`n=2`.

Finally, we substitute our values into the equation:

`125 * 1.18^2 =174.05`

This means our final answer is $174.05.