Question

If you invested $100 at the end of year 1 and $200 at the end of year 2 at an interest rate of 5 per cent, how much would you have at the end of year 2? Assume compound interest.

Answer 1

$100 invested at the end of 1 year will not earn any interest for year 1. It will earn interest only for year 2. Similarly, $200 invested at the end of year 2, will not earn anu interest for year 2. Based on this, we will now calculate the amount at the end of year 2 as per below:

We will start with the end of year 1 when $100 is invested:

Here we will use the following formula:

FV = PV * (1 + r%)ⁿ

where, FV = Future value, PV = Present value = $100, r = rate of interest = 5%, n= time period = 1

now, putting theses values in the above equation, we get,

FV = $100 * (1 + 5%)¹

FV = $100 * (1 + 0.05)¹

FV = $100 * (1.05)¹

FV = $100 * 1.05

FV = $105

So, $100 will become $105 at the end of year 2.

Now, another $200 is invested.

Future value or amount at the end of year 2 = $105 + $200 = $305