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Real World Applications - Interest











































A person deposited $500. in a savings account that pays 5% annual interest that is compouded yaerly. At the end of 10 years,how muchmoney will be in the savings account?

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Feb 05, 2012
Interest Calculations
by: Staff


Question:

A person deposited $500. in a savings account that pays 5% annual interest that is compouded yaerly. At the end of 10 years,how muchmoney will be in the savings account?


Answer:


principal $500, rate 5% compounded annually, time 10 years


A = P*(1 + r)^t

A = final balance of the investment at the end of 10 years

P = principle (the initial investment)

r = decimal form of annual interest rate

t = time in years (number of 12 month periods)

P = $500

t = 10 years (note: if the time period were in quarters t = 4 quarters per year x 10 years = 40 quarters)

r = 0.05

(.05 is the decimal form of 5%. It is = 5÷100. r = the interest rate per time period (annually in this case): .05/1 = 0.05 [note: if the interest were compounded quarterly r = .05/4; if the interest were compounded monthly r = .05/12; etc. )


A = P*(1 + r)^t

A (at 10 years) = 500*(1 + 0.05)^10

A (at 10 years) = 500*(1.05)^10

A (at 10 years) = 500*(1.62889462678)

A (balance at 10 years) = 814.45



>>>The final answer is: A (balance at the end of 10 years) = $814.45



Thanks for writing.

Staff
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