Question

Investment: Suppose you receive a gift of $1,000 and decide to open a CD (certificate of deposit) as a low risk investment. The best CD rate you could find is 2.25%, which means that your original investment will grow at a rate of 2.25% each year. Assuming the rate of increase does not change, which of the following statements is TRUE about your CD account balance?

It will no longer grow after several years.

It will double in approximately 10 years.

4 years after the original investment, it is approximately $1,093

It will triple in approximately 3 years.

Answer 1

The value of an investment that pays compound interest on CD's are

A = P(1+r/100)^t

where A is the current amount

P is the initial amount

r is rate of interest in %

t is time period of investment.

Given,

P = 1000

r = 2.25

For 10 years, t = 10

A = 1000 * (1+2.25/100)¹⁰ = $1249.203

Thus, the amount does not double in approximately 10 years.

For 3 years, t = 3

A = 1000 * (1+2.25/100)³ = $1069.03

Thus, the amount does not triple in approximately 10 years.

For 4 years, t = 4

A = 1000 * (1+2.25/100)⁴ = $1093.083

Thus, 4 years after the original investment, it is approximately $1,093