You deposit $1,000 and will receive 5% each year on your principal and interest. what is...
You deposit $1,000 and will receive 5% each year on your principal and interest. what is your interest on interest in year 5?
Homework Answers
Interest on Interest = Compound Interest - Simple Interest
Compound interest can be computed using basic time value of money function, according to which
FV = PV * (1 + r)n
FV = $1,000 * (1 + 5%)5
FV = $1,000 * 1.276282
FV = $1,276.28
Compound Interest = $1,276.28 - $1,000 = $276.28
Simple Interest = Principle * Rate * Time = $1000 * 5% * 5 = $250
Hence, Interest on Interest = $276.28 - $250 = $26.28
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