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A person invests $500 in an account that earns a nominal yearly interest rate of 4%. Someone, please solve this little by little I'm really confused!

 Mar 19, 2019
 #1
avatar+18280 
+2

a. if the interest rate is 4% , the account will grow 4% more than the year before  EACH YEAR   

     initial 500 deposit will be worth   500 x 1.04 at the end of year 1 = $520

     at the end of the SECOND year, due to compounding, it will be worth   520 x 1.04=$ 540.80

   after 10 years    the formula becomes    500 (1.04)^10 = $ 740.12

 

b.1.04 is the interst applied PER YEAR     .... now the compounding period is 3 months....4 PERIODS per year..

..the periodic interest is then  .04/4 = .01/period    for 40 periods (10 years)

     and the formula becomes    

        500 (1.01)^40 = 744.43      NOTE: Due to COMPOUNDING this works out to be GREATER than 4% per year

                                                      (perhaps you have heard "APR"   = annual percentage rate     or

                                                              APY = annual percentage yield)

 

c. 1.04  = (1+x)^4      x = .009853  or 0..09853 %  per quarter compounding

d.  500 (1+ .009853)^40 = 740.12

 Mar 19, 2019
 #2
avatar-19 
-6

Thanks so much! I'm glad you helped me laugh

GAMEMASTERX40  Mar 19, 2019
 #3
avatar+18280 
+2

You are welcome....this stuff will be very important to you later in your financial life (REALLY!)....learn it well!  ~EP

 Mar 19, 2019
edited by ElectricPavlov  Mar 19, 2019

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