Question

1. Your great-great-great grandmother gave your great-great grandfather a $50 certificate of deposit (CD) in 1912. The CD has been handed down from generation to generation to you upon your birth in 1998. If the CD has averaged an interest rate of 5.5% per year, how much is the CD worth at the end of 2017? a. Assume the CD paid simple interest. b. Assume the CD paid compound interest.

Answer 1

In both cases, time period is 105 years and rate of interest is 5.5%

a. When the CD paid simple interest.

In this case, we use the formula for Simple interest. Amount A = P + (P x R x T)

= 50 + 50 x 5.5% x 105

= $338.75. This is the current worth of the CD when it pays simple interest.

b. When the CD paid compound interest.

Use the formula Amount A = P(1 + r%)^n

A = 50*(1+5.5%)^105

= $13189.05

This is the current worth of the CD when it pays compound interest.