Question

find the amount of interest earned on an investment: principal of $200, interest rate of 4 percent per year compounded quarterly, period of 2 yrs

Answer 1

Oh, okay...compound interest... :)

Answer 2

So, how would you like to be helped? Do you want someone to explain to you how to solve it or are you just here to check your answer?

Answer 3

I checked the solution manual and I found 200 ((1.01) to the 8th power) - 1. My question is how did they get 1.01

Answer 4

Well, okay, I can type out the solution for you...

Answer 5

The formula for compound interest quarterly is:

\[A = P(1+\frac{r}{n})^{nt} \]

So plugging in the known values of P, n, and t, we get:

\[A = 200(1+\frac{.04}{4})^{4*2}\]

So now, just following simple order of operations...we deal with the parentheses first, and within the parentheses, division has priority, so if you divide .04/4 you get .01. Add 1 to that and you get 1.01:

\[A = 200(1.01)^{8} \]

Now, where you got the -1 from...you'll have to explain that one to me.

Answer 6

Thank you you are a true angel...now could you also enlighten me by telling me how can you tell when to use the compound interest versus the basic formula?

Answer 7

What basic formula?

Answer 8

First of all....I notice one thing about compound interest problems...They almost ALWAYS say the words "compounded quarterly" or compounded annually" or "compounded daily" or compunded continuously"... as soon as I see the word "compounded" I think to myself, "Oh, this is a compound interest problem.". Problems that involve "basic formulas" probably wouldn't have "compounding interest".

Answer 9

I hope that helps.