Question

1. Jared borrowed $300 from his mother to buy an x-box 360. Jared will pay her back in 4 years with 3.5% simple interest. How much total money will he payback to his mother at the end of the 4 years? (Hint: which formula should you use simple or compound, what is the principal, what is the rate, what is the time.)

2. Jackie deposits $225 in an account that pays 4.1% interest compound annually. How much money would Jackie have in her account after 1.5 years? (Hint: which formula should you use simple or compound, what is the principal, what is the rate, what is the time.)

3. Stephanie placed $1,700 in an account that earns 6% interest compounded annually. How much money will she have in the account at the end of 48 months? (Hint: which formula should you use simple or compound, what is the principal, what is the rate, what is the time.) ​

Answer 1

1) future value = present value x [1 + (i x n)] = $300 x [1 + (3.5% x 4)] = $342

2) using the compound interest formula:

future value = $225 x (1 + 4.1%)¹°⁵ = $238.98

Using the simple interest formula doesn't yield the same answer = $225 x [1 + (4.1% x 1.5)] = $238.84. In this case it is close due to a very short period of time and low interest rate.

3) future value = present value x (1 + i)ⁿ = $1,700 x (1 + 6%)⁴ = $2,146.21

since the interest is annual, we must convert 48 months to 4 years