How much interest will be earned in the second year on an investment paying 7% interest,...

How much interest will be earned in the second year on an investment paying 7% interest, compounded annually, if $350 was just credited to the account for interest at the end of year 1?

a. $374.50

b. $325.50

c. $350.00

d. $5,724.50

Expert Solution

For compound interest, interest in successive period is earned on the principal amount along with previously accumulated interest.

Interest earned on 2nd year = Annual interest for principal + Interest for first year interest earned

= $ 350 + $ 350 x 0.07

= $ 350 + $ 24.50

= $ 374.50

Hence option “a. $ 374.50” is correct answer.

jeff jeffy answered 1 year ago

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