A sum of $2500 is invested at a compound interest rate of 6% per annum. What wil

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Question: A sum of $2500 is invested at a compound interest rate of 6% per annum. What will be the amount after 2 years?

Options:

Correct Answer: $2820

Solution:

Amount = P(1 + r)^n = 2500(1 + 0.06)^2 = 2500(1.1236) = $2809.

A sum of $2500 is invested at a compound interest rate of 6% per annum. What will be the amount after 2 years?

A sum of $2500 is invested at a compound interest rate of 6% per annum. What will be the amount after 2 years?

Step 1: Identify the principal amount (P), which is $2500.
Step 2: Identify the annual interest rate (r), which is 6%. Convert this to decimal form by dividing by 100: 6% = 0.06.
Step 3: Identify the number of years (n) the money is invested, which is 2 years.
Step 4: Use the compound interest formula: Amount = P(1 + r)^n.
Step 5: Substitute the values into the formula: Amount = 2500(1 + 0.06)^2.
Step 6: Calculate (1 + 0.06) = 1.06.
Step 7: Raise 1.06 to the power of 2: (1.06)^2 = 1.1236.
Step 8: Multiply the principal amount by the result: Amount = 2500 * 1.1236.
Step 9: Calculate the final amount: Amount = $2809.

Compound Interest – Understanding how compound interest works, including the formula used to calculate the future value of an investment.
Exponents – Applying exponent rules in the context of compound interest calculations.
Financial Literacy – Basic knowledge of investment principles and the impact of interest rates over time.