If Michael invests $2000 in the bank at a rate of 5.5% for 6 years how much interest will he make?

Question

If Michael invests $2000 in the bank at a rate of 5.5% for 6 years how much interest will he make?

Answer 1

the underlying formula that you want to use to solve this one is

interest = principal x rate x time

for this set of values that means taking

interest = 2000 x 0.055 x 6

= 110 x 6

=660

meaning that Michael will make $660 in interest

Answer 2

Hi Michael,

We do need to know more information to answer this question correctly.

1) When is the $2,000 invested each year? At the beginning (January 1st), or at the end (January 31st)? I think we can assume January 1st. This means we need to figure out the future value of an annuity due (meaning the money is invested right away, so interest doesn't accrue until December 31st of Year 1.

2) How often does the interest compound? Yearly? Monthly? Quarterly? Since it doesn't specify otherwise, let's assume it compounds annually.

Since Michael is investing $2,000 each year, this is called an annuity.

Use the below formula to figure out the future value of the annuity due.

P = 2,000

r = 5.5% (0.055)

n = 6

1.055 * (2,000 * [(1 + 0.055)^6 - 1)/(0.055)])

= 14,533.79