Question

On January 1, 2018, you deposited $5,200 in a savings account. The account will earn 10 percent annual compound interest, which will be added to the fund balance at the end of each year. Required: 1. What will be the balance in the savings account at the end of 7 years? 2. What is the total interest for the 7 years? 3. How much interest revenue did the fund earn in 2018 and in 2019?

Answer 1

1) Calculation of balance in the savings account at the end of 7 years :

Amount deposited in savings account = $5200

Compounded annual interest rate = 10%

Maturity period = 7 years

Balance in the savings account at the end of 7 years =

Amount deposited in savings account x (1 + Interest rate)^n

= $5200 x (1 + 0.10)^7

= $5200 x (1.10)^7

= $5200 x 1.9487 = $10133.24

2) Calculation of total interest for 7 years :

Deposited amount in savings account = $5200

Balance in the savings account at the end of 7 years = $10133.24

Total interest for the 7 years =

Balance in the savings account at the end of 7 years - Deposited amount in savings account

= $10133.24 - $5200 = $4933.24

3) Calculation of fund revenue that fund should earn in 2018 and 2019 :

Interest revenue for 2018 =

Amount deposited at the beginning of 2018 x Annual compounded interest rate

= $5200 x 10% = $520

Balance of savings accounts at the end of 2018 = $5200 + $520 = $5720

Interest revenue for 2019 =

Balance of savings accounts at the end of 2018 x Annual compounded interest rate

= $5720 x 10% = $572