Question

A woman invests a specific amount of money which earns compounded interest at a particular rate. This situation is represented by the equation: A=1000(1.023)2t. (Remember: A=P1+rnnt)

Answer 1

• Amount invested = $1,000
• Interest = 4.6%
• Number of compounding periods = 2

Explanation:

First expand the expression so it looks like the formula for compound interest.

1.023 is the same as 1 + 0.023

A = 1,000 * (1 + 0.023) ^ 2t

P = Initial amount invested.

r = the interest rate

n = number of times compounded

t = no of periods or years.

Amount invested is therefore $1,000.

Number of compounding times is 2.

Interest rate should be 0.023 but from the formula we see it has already been divided by the number of compounding periods which is 2. Interest is therefore:

= 0.023 * 2

= 0.046

= 4.6%