Problem 1 Mrs. Doe deposits $100 into a saving account that earns interest at %1

Question

Problem 1 Mrs. Doe deposits $100 into a saving account that earns interest at %12 a year compounded monthly. How much interest will be earned during: 1) the first year; 2) the second year. Problem 2 Find the compound interest earned on the investment of $100 for 5 years at a nominal rate of 5% compounded with frequencies: annual, semi-annual, quarterly, monthly, weekly and daily. Problem 3 Mr. Doe can buy a car for S50,000 cash or payments of S35,000 down and S25,000 in 5 years. If he can earn interest at 10% a year compounded weekly, which plan is better?

Explanation / Answer

Answer to Problem 1:

Amount deposited = $100

Annual Interest Rate = 12%
Monthly Interest Rate = 1%

Balance at the end of Year 1 = $100 * 1.01^12
Balance at the end of Year 1 = $112.68

Interest Earned = $112.68 - $100
Interest Earned = $12.68

Balance at the end of Year 2 = $112.68 * 1.01^12
Balance at the end of Year 2 = $126.97

Interest Earned = $126.97 - $112.68
Interest Earned = $14.29

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