Question

compute the future value of 1250 compounded annually for

a)10 years at 5 percent

b) 10 years at 10 percent

c)20 years at 5 percent

d) why is the interest earned in part c not twice the amount earned in part a ?

Answer 1

a ) 10 years at 5 percent

P =1250

r = 5% compounted annually

m =number of compounted annually =1

   n = 10 year

   A = P [ 1 + r / 100 ]ⁿ

= 1250 [ 105 / 100 ] ¹⁰

= 1250 * 1.6288

= $ 2036.11

b )

     A = P [ 1 + r / 100 ]ⁿ

n = 10

r = 10%

A = 1250 [ 110 / 100]¹⁰

= 1250 *2.5937

=$ 3242.17

c )

  

     A = P [ 1 + r / 100 ]ⁿ

n = 20

r = 5%

A = 1250 [ 105 / 100 ]²⁰

= 1250 * 2.6532

=$ 3316.5

d ) here part c is not twice the amount of part a.interest compount on the interest is alrerady earned with  

compound interest. future values are grow becoming more and more.