Question

Consider a $1,800 deposit earning 8 percent interest per year for five years. Find How much total interest is earned on the original deposit?, and How much is interest earned on interest?

Answer 1

Total Interest on Original Deposit = Principal * Interest rate * Times

= $ 1,800 * 8% * 5

= $ 720

Hence the total interest is earned on the original deposit is $ 720

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

A= $ 1,800 * (1+8/100) ^ 5

= $ 1,800 * 1.469328077

= $ 2,644.790538

Interest Earned on Interest = ( Future Value - Principal Amount) - Total Interest on Original Deposit

= ($ 2,644.790538- $ 1,800) - $ 720

= $ 124.79

Hence the  interest earned on interest is $ 124.79