Question

(step by step calculation please) Suppose you invest $1000 in an account paying 6% interest per year. What is the balance in the account after 3 years? Calculate how much of this balance corresponds to “interest on interest”

Answer 1

: Calculation of balance after three years :

Compound Amount = Principal * (1 + rate)n

Principal = 1000

r is rate of interest i.e 6 % or 0.06

n is the number of years i.e 3

Compound Amount = 1000 * (1 + 0.06)3

= 1000 * 1.191016

= 1191.016

Balance that corresponds to "interest on interest"

Calculation of Interest on Interest = Compound Amount - Simple Interest - Principal

Compound Amount (Already calculated) = 1191.016

Simple Interest = Principal * Rate * Number of years

= 1000 * 6 % * 3

= 180

Principal = 1000

Calculation of Interest on Interest = 1191.016 - 180 - 1000

= 11.016