core: 0 of 1 pt 6 of 7 (7 complete) Hw Score: 85.71 %, 6 of 7 p Problem 3.LO2.7
ID: 2408003 • Letter: C
Question
core: 0 of 1 pt 6 of 7 (7 complete) Hw Score: 85.71 %, 6 of 7 p Problem 3.LO2.7 (similar to Question Help You deposit $400 in a bank in a 6-year time deposit. With a time deposit you cannot withdraw funds from the account until the end of the term. Interest in the account is compounded seniannually (m-2 at the annual nominal rate of 10%. In the final compounding interval, what is the dollar amount of nterest that is carned from earlier interest (rather than off of the original principal)? n the final compounding interval, what is the dollar amount of interest that is earned from earlier interest? (Round to the nearest cent.)Explanation / Answer
Total number of semi-annual compounding periods in 6 year = 6 years * 2 = 12
Semi-annual interest rate = 10%/2 = 5% = 0.05
Future value of investment = Amount invested * (1 + Interest rate)number of periods
Value of the investment after 11 compounding periods = $400 * 1.0511 = $684.14
Total Interest earned in the last compounding interval = $684.14 * 0.05 = $34.21
Interest earned on the original principal = $400 * 0.05 = $20
Interest earned on the earlier interest = $34.21 - $20 = $14.21
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