Question

Interest-on-Interest Consider a $2,300 deposit earning 10 percent interest per year for 7 years. How much total interest is earned on interest (excluding interest earned on the original deposit)? Multiple Choice () $572.05 $1,610.00 $161.00 $2,182.05

Answer 1

Interest Earned on the Original Investment is the simple interest earned.

Simple Interest = Principal * Rate * Time to Maturity

= $2,300 * 0.10 * 7 = $1,610

FV = PV * (1 + r)ⁿ

= $2,300 * (1 + 0.10)⁷ = $2,300 * 1.9487 = $4,482.05

Total Interest Earned = Future Value - Original Investment = $4,482.05 - $2,300 = $2,182.05

Interest-on-interest = Total Interest Earned - Interest Earned on the Original Investment

= $2,182.05 - $1,610 = $572.05

Hence, 1st Option is correct.