Question

You have 500 in an account which pays 4.6% compounded annually. How many additional dollars of interest would you earn over 5 years if you moved the money to an account earning 6.7%?

Answer 1

Here, first we will calculate the future value at 4.6% and then we will calculate the value at 6.7%. The difference in their future values will be the additional dollars of interest due to change in rates.

Future value at 4.6%:

For future value calculation, we will use the following formula:

FV = PV * (1 + r%)ⁿ

where, FV = Future value, PV = Present value = $500, r = rate of interest = 4.6%, n= time period = 5

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

FV = $500 * (1 + 4.6%)⁵

FV = $500 * (1 + 0.046)⁵

FV = $500 * (1.046)⁵

FV = $500 * 1.25215595324

FV = $626.077976621

Future value at 6.7% will be:

FV = PV * (1 + r%)ⁿ

where, FV = Future value, PV = Present value = $500, r = rate of interest = 6.7%, n= time period = 5

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

FV = $500 * (1 + 6.7%)⁵

FV = $500 * (1 + 0.067)⁵

FV = $500 * (1.067)⁵

FV = $500 * 1.38299973573

FV = $691.499867865

Additional dollars of interest = $691.499867865 - $626.077976621

Additional dollars of interest = $65.4218912441