Question

Your bank pays 4% interest annually. You have $2,500 invested in the bank. How long will it take for your funds to be double?

Answer 1

This is an application of time value of money.

Mathematically, FV = PV * (1 + r)ⁿ

Initial amount deposited or PV = $2,500

Rate of interest, r = 4% (annually)

Future value, FV = 2 * $2,500 = $5,000

Now, we need to calculate the number of year or n.

Substituting for the values in mathematical relation above,

5,000 = 2,500 * (1 + 0.04)ⁿ

2 = (1.04)ⁿ

Just by hit and trial, (1.04)¹⁸ = 2.03 {(1.04)¹⁷ = 1.94}

Hence, n is approx equal to 18 years.

(Exact calculation through excel is 17.67 years).