Question

a. You deposit $1,800 in your bank account. If the bank pays 5% simple Interest, how much will you accumulate in your account after 8 years? Future value b. What if the bank pays compound Interest (annually? (Do not round Intermediate calculations. Round your answer to 2 decimal places) Compound Interest c. How much of your earnings will be interest on Interest? (Round your answer to 2 decimal places.) Interest on Interest

Answer 1

(a) First we will calculate simple interest by the following formula:

Simple interest = P* r *n

where, P = Principal amount = $1800, R is rate of interest = 5% and n is time period = 8

Now, simple interest is:

Simple interest = $1800 * 5% * 8

Simple interest = $180

Now, after 8 years, accumulated amount is:

Amount = Principal + Simple interest

Amount = $1800 + $180 = $1980

(b)  Here we will use the following formula:

FV = PV * (1 + r%)ⁿ

where, FV = Future value, PV = Present value = $1800, r = rate of interest = 5%, n= time period = 8

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

FV = $1800 * (1 + 5%)⁸

FV = $1800 * (1 + 0.05)⁸

FV = $1800 * (1.05)⁸

FV = $1800 * 1.47745544379

FV = $2659.42

So, the amount after 8 years will be $2659.42.

Compound interest = Future value - Present value

Compound interest = $2659.42 - $1800 = $859.42

(c) Interest on interest = Compound interest - Simple interest

Interest on interest = $859.42 - $180

Interest on interest = $679.42