Question

The present value of the money in your savings account is $420, and you're receiving 3% annual interest compounded monthly. What is the future value in two months? A. $426 B. $422.10 C. $432.60 D. $424.11

Incorrect Answer-C. $432.60
correct answer-B. $422.10

$420 + 3% = 12.60$12.60/ 12 months (annual interest) = $1.05$1.05 x 2 = $2.10$420 + $2.10 = $422.10

Answer 1

Present value: P=$420
Annual interest: i=3%=3/100→i=0.03
Compounded monthly→Number of periods per year: n=12
Future Value: F=?
In two months: t=2

F=P(1+i/n)^t
F=$420(1+0.03/12)^2
F=$420(1+0.0025)^2
F=$420(1.0025)^2
F=$420(1.005006250)
F=$422.1026250
Rounded to two decimal places:
F=$422.10

Answer: Option B. $422.10