Three connected word problems about interest and bank accounts.

Question

1)Imagine that your parents establish a savings account when your were born. They deposit $1500 with an interest rate of 2.45% compounded yearly. What will you balance be at age 18?

 

2)Certificates od deposits(CD's), which are guaranteed for a specific amount of time, generally offer a higher percentage rate then saving accounts. When you entered six grade, your parents opened a $2000 seven year CD with 5.87% interest rate that is compounded yearly. How much would your balance be after high school graduations just for the CD's.

 

3)Imagine that you could have the same percentage rate in your saving account that you had in your CD. How much would your balance be at age 18?

Answer 1

Compound interest uses the equation:

A = P (1+r/n)^nt

A is the final amount

P is the principal amount

r is the interest rate

n is the number of times compounded yearly

t is the number of years

 

Since all of your problems are compounded yearly (n=1), the equation simplifies to

A = P (1+r)^t

 

1) P = 1500, r = 0.0245, t = 18

 

2) P = 2000, r = 0.0587, t = 7

 

3) P = 1500, r = 0.0587, t = 18

 

Can you find these answers? Please comment if you're having trouble.