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What is the compound interest on $5000 at a rate of 6% per annum for 4 years?

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Question: What is the compound interest on $5000 at a rate of 6% per annum for 4 years?

Options:

  1. $1272.48
  2. $1265.00
  3. $1300.00
  4. $1200.00

Correct Answer: $1272.48

Solution: 

Compound Interest = 5000(1 + 0.06)^4 - 5000 = 5000(1.26247696) - 5000 = 1312.38

What is the compound interest on $5000 at a rate of 6% per annum for 4 years?

Practice Questions

Q1
What is the compound interest on $5000 at a rate of 6% per annum for 4 years?
  1. $1272.48
  2. $1265.00
  3. $1300.00
  4. $1200.00

Questions & Step-by-Step Solutions

What is the compound interest on $5000 at a rate of 6% per annum for 4 years?
Correct Answer: 1312.38
  • Step 1: Identify the principal amount (P), which is $5000.
  • 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 (t), which is 4 years.
  • Step 4: Use the compound interest formula: A = P(1 + r)^t, where A is the total amount after t years.
  • Step 5: Substitute the values into the formula: A = 5000(1 + 0.06)^4.
  • Step 6: Calculate (1 + 0.06) = 1.06.
  • Step 7: Raise 1.06 to the power of 4: (1.06)^4 = 1.26247696.
  • Step 8: Multiply this result by the principal: A = 5000 * 1.26247696.
  • Step 9: Calculate A = 6312.38.
  • Step 10: To find the compound interest, subtract the principal from the total amount: Compound Interest = A - P = 6312.38 - 5000.
  • Step 11: Calculate the compound interest: Compound Interest = 1312.38.
  • Compound Interest – The interest calculated on the initial principal, which also includes all the accumulated interest from previous periods.
  • Exponential Growth – Understanding how the interest compounds over multiple periods, leading to growth that accelerates over time.
  • Percentage Calculation – Applying the percentage rate to the principal amount to determine the interest earned.
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