Question

5.7 An account was opened with $1,000 ten years ago. Today, the account balance is $1500. If the account paid interes compounded annually, how much interest on interest was camed? A $86.20 - 10 B. $93.10 1500 - 1000 (1 + r)' C. $102.39 1000 1500 D. $130.28 PNO =Fvio ( a)' = 1 + 1.04138-Jar =>r = 4.14% $500.00 = ?

Answer 1

Correct Answer: A. $86.20

Initial Deposit (P) = $1,000

Period in years(n) = 10

Current Account balance (A) = $1,500

Interest rate = r

Putting the values to compounding interest formula to find interest rate:

P*(1+r)" = A

1000 *(1+r)10 = 1500

T = 1.51/10 - 1

r = 0.0413797

Total interest earned in 10 years = 1500-1000 = $500

Simple interest earned in 10 years:

= 1000 * 0.0413797*10

= 413.80

Thus, Interest earned on Interest

= 500 -413.80

= $86.20

Please note:

Total compound interest = Simple interest + Interest earned on interest

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.