Question

Yvonne deposits $5000 in a bank account which pays 4% per annum compound interest. What is the total interest earned in 5 years, correct to the nearest dollar

Answer 1

$1,083

Explanation:

The compound interest formula is expressed as
`A = P(1+r/n)^(nt)`

A is the total amount after n years

P is the amount deposited (principal)

r is the rate (in %)

t is the time (in years)

n is the time of compounding

Given P = $5000, r = 4% = 0.04, t = 5 years, n = 1 year (per annum compound interest)

On substituting into the formula we have;

`A = 5000(1+0.04)^(1(5)) \\A = 5000(1.04)^(5) \\A = 5000*1.2166529\\A = 6,083.26`

Interest earned = Amount - Principal

Interest earned = $6,083.26 - $5,000

Interest earned = $1,083.26 ≈ $1,083

Hence, the total interest earned in 5 years is $1,083 to the nearest dollars.