Use the compound interest formulas

Question

Use the compound interest formulas A=P(1+r/n) and A=Pe^rt to solve

 

Find the accumulated value of an investment of $1600 at 8% compounded quarterly for 2 years.

 

 

 

 

 

 

 

 

(answer is $1874.66 but i need help step by step how they got this answer)

Answer 1

Hi Cathryn,

 

A few things before using the formula to get the numbers

 

compounded quarterly for two years means compounded eight times (2years*4compounding/1year=8compounding).

 

Although the interest rate is 8 (8 per year that is), it is not the interest rate you would use to compute every time you compile. But rather you divide the annual interest rate (8%) by the number of times you compile (which is 4)

 

interest rate is now 2% == .02

 

Now you just use the formula to find the accumulated value

P = 1600

r = .02

n = 8

 

and the formula is A=P(1+.02)^8

 The most important part of this problem is to realize that how often you compile makes a difference , I think.