Question

What would be the interest earned on a $6,000 deposit during the second year of its life if no money is withdrawn from the bank during that time, and the deposit pays an annual interest rate of 2.5 percent, with annual compounding?

Answer 1

The interest earned during the second year of the life of a deposit of $6,000 if no money is withdrawn from the bank during that time is $153.75.

Step-by-step explanation:

Since it is an annual compounding without any money withdrawn, that mean interest will be paid on both the principal and the first year interest income. Therefore, we have:

First year interest earned = Principal * Annual interest rate = $6,000 * 2.5% = $150

Second year interest earned = (Principal + First year interest earned) * Annual interest rate = ($6,000 + $150) * 2.5% = $6,150 * 2.5% = $153.75

Therefore, the interest earned during the second year of the life of a deposit of $6,000 if no money is withdrawn from the bank during that time is $153.75.