A credit union client deposits $2,000 in an account earning 3% interest, compounded monthly. What will the balance of the account be at the end of 17 years?

Answer 1

Hullo, Hadassah;

The formula for compound interest is: A = P (1 + i)ⁿ

Here: P = principal deposited,

A = amount at the end,

i = interest rate percentage per period, and

n = number of compounding periods

In the question, the nominal interest rate is 3% per year. Since interest is compounded monthly the effective rate = 3/12% = 1/4% per month (This is what we use for i)

The initial amount, P = $1,000

The number of compounding periods, n = 17 x 12 = 204 months

Finally, we want the amount at the end, so we must calculate A

Therefore, A = 1000 (1 + 1/4%)²⁰⁴ = 1000 x 1.0025²⁰⁴ [ since 1/4% = 0.0025]

= $1,664.23