Question

You deposit $500 in an account earning 8% compound interest for 3 years. Find the future value and the interest earned for each of the following compounding frequencies.

Frequency	Future Value	Interest Earned
Annually
Semiannually
Quarterly
Monthly
Daily

Answer 1

Solution:-

To Calculate Future Value and Interest Earned-

Annually Compounded-

Future Value = Present Value *

Future Value = $500 *

Future Value = $500 * 1.259712

Future Value = $629.86

Interest Earned = Future Value - Present value

Interest Earned = $629.86 - $500

Interest Earned = $129.86

Semi-Annually Compounded-

Future Value = Present Value *

Future Value = $500 *

Future Value = $500 *

Future Value = $500 * 1.265319

Future Value = $632.66

Interest Earned = Future Value - Present value

Interest Earned = $632.66 - $500

Interest Earned = $132.66

Quarterly Compounded-

Future Value = Present Value *

Future Value = $500 *

Future Value = $500 *

Future Value = $500 * 1.26824

Future Value = $634.12

Interest Earned = Future Value - Present value

Interest Earned = $634.12 - $500

Interest Earned = $134.12

Monthly Compounded-

Future Value = Present Value *

Future Value = $500 *

Future Value = $500 *

Future Value = $500 * 1.27024

Future Value = $635.12

Interest Earned = Future Value - Present value

Interest Earned = $635.12 - $500

Interest Earned = $135.12

Daily Compounded-

Assume 365 days in a year

Future Value = Present Value *

Future Value = $500 *

Future Value = $500 *

Future Value = $500 * 1.27122

Future Value = $635.61

Interest Earned = Future Value - Present value

Interest Earned = $635.61 - $500

Interest Earned = $135.61

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