If a person invests $500 at a compound interest rate of 4% per annum for 2 years

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Question: If a person invests $500 at a compound interest rate of 4% per annum for 2 years, what will be the total amount?

Options:

Correct Answer: $540.80

Solution:

Total Amount = P(1 + r/n)^(nt) = 500(1 + 0.04)^2 = 500 * 1.0816 = $540.80.

If a person invests $500 at a compound interest rate of 4% per annum for 2 years, what will be the total amount?

If a person invests $500 at a compound interest rate of 4% per annum for 2 years, what will be the total amount?

Step 1: Identify the principal amount (P), which is the initial investment. Here, P = $500.
Step 2: Identify the annual interest rate (r). Here, r = 4%, which is 0.04 in decimal form.
Step 3: Identify the number of years (t) the money is invested. Here, t = 2 years.
Step 4: Use the compound interest formula: Total Amount = P(1 + r)^t.
Step 5: Substitute the values into the formula: Total Amount = 500(1 + 0.04)^2.
Step 6: Calculate (1 + 0.04) = 1.04.
Step 7: Raise 1.04 to the power of 2: 1.04^2 = 1.0816.
Step 8: Multiply the result by the principal amount: 500 * 1.0816 = 540.80.
Step 9: The total amount after 2 years is $540.80.

Compound Interest – Understanding how compound interest works, including the formula and its components (principal, rate, time).