Question

if you deposit $2000 in a bank account that pays 6% interest annually, how much will be in your account after 5 yrs

Answer 1

Essentially, compounding means that your interest is earning interest. Not only are you earning interest on your principal deposit, but you're also earning on the interest amount as well, so your principal deposit grows faster than if you just earned interest on the deposit alone. How often you compound determines how quickly your deposit grows, with more compounding periods resulting in greater interest accrued.

Basic formula for compound interest:

A_t = A₀(1+r)ⁿ

where:

A₀ : principal amount, or initial investment
A_t : amount after time t
r : interest rate
n : number of compounding periods, usually expressed in years

so,amount will be 2000(1.06)⁵

i.e.$2676.45