Question

If you invest $2,000 with a 4% interest rate compounded annually, how much will you have in ten years?

2-If you are going to receive $2,000 in six years from now, how much is that worth today, assuming 5% annual simple interest?

Which of the following options will generate the highest interest over the term, assuming the same $100 principal?

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5% simple interest rate for 3 years

5% quarterly compounding for 3 years

5% monthly compounding for 2 years

5% daily compounding for 2 yea

What’s the effective rate for investment with a 6% annual rate, compounded quarterly?

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6%

6.45%

1.5%

6.14%

Answer 1

1.

Investment = $2000
Interest rate = 4% compounded annually
time = 10 years

We have future value formula:

Where,
FV = Future Value
PV = Present Value
i = rate of return in decimal
n = number of years

Therefore,

2.

Future value = $2000
Interest rate = 5% simple interest
time = 6 years

Where,
FV = final amount
PV = Present value which we have to find out
r = rate of simple interest
t = time in years

3. Principal $100

(i) 5% simple interest rate for 3 years

(ii)  5% quarterly compounding for 3 years

(iii) 5% monthly compounding for 2 years

(iv) 5% daily compounding for 2 yea

From (i) (ii) (iii) and (iv), we can see that "(ii) 5% quarterly compounding for 3 years" generate highest interest over the term.

4.

For Effective rate we have a formula:

Where, E = effective rate

OR

Therefore, effective rate of interest is 6.14%.

If any doubts, ask me in the comments.