Question

Old Time Savings Bank pays 4% interest on its savings accounts. If you deposit $2,800 in the bank and leave it there: (Do not round intermediate calculations. Round your answers to 2 decimal places.)

a. How much interest will you earn in the first year?

b. How much interest will you earn in the second year?

c. How much interest will you earn in the 10th year?

Answer 1

Solution Part (a).

Future value Year 1=

Pv × (1 + r)= $2,800 × 1.04= $2,912

Interest of Year 1= Fv of year 1– PV of year 1

= $2,912 – 2,800= $112

(b) Part.

Fv of Year 2= Present value × (1 + r)2

= $2,800 × 1.0816= $3028.48

Interest Year 2= Fv of Year 2– Fv of Year 1

= $3,028.48 - $2,912 = $116.48

Part (C).

Fv of Year 9= Present value × (1 + r)9

= $2,800 × 1.4233= $3,985.27

Fv of Year 10= Present value × (1 + r)10

= $2,800 × 1.4802= $4144.68

Interest Year 10= Fv of Year 10– Fv of Year 9

= $4144.68 – 3985.27= 159.41