Question

Calculate the future value of $1,000 in

a. Four years at an interest rate of 10% per year.

b. Eight years at an interest rate of 10% per year.

c. Four years at an interest rate of 20% per year.

d. Why is the amount of interest earned in part (a​) less than half the amount of interest earned in part (b​)?

Answer 1

Hello Sir/ Mam

(a)

(b)

(c)

(d)

Amount of interest earned in Part (a) ,i.e. $464.10 is less than half the interest earned in Part (b), i.e. $1,143.59 because of compunding. This means that each year interest accrued is added to the outstanding principal and hence, increases the interest for the subsequent period. Hence, interest for periods 5,6,7 and 8 are much more than that of period 1,2,3 and 4. Hence, less than half.

I hope this solves your doubt.

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