Compound Interest Quiz

Label each variable of the compound interest formula (except the n in the exponent).

d

e

f

g

h

Compounding frequency

Amount owed

Principal

Interest rate (as decimal)

Interest rate (as percent)

Final amount

Principle

Time (years)

Assume interest is compounded annually. Suppose you deposit $300 in a new savings account paying an annual yield of 2.5%. If no deposits or withdrawals are made, how much money will be in the account at the end of 5 years?

Mathematical Equivalence

ON

Assume interest is compounded annually. A bank advertises an annual yield of 4.81% on a 5-year CD (certificate of deposit). If the CD's original amount was $2,000, how much will it be worth after 5 years?

Mathematical Equivalence

ON

Susana invests $250 at an annual yield of 4%. Jake invests $250 at an annual yield of 8%. They leave the money in the bank for 2 years. Since Jake's interest rate is twice Susana's, does Jake earn twice the interest that Susana does? Why or why not?

• Yes because 4% x 2 = 8%.

• Yes because they have the same principal and they both leave the money in the bank the same amount of time.

• No because the interest is compounded, which means it is calculated as a percent of a higher amount of money after the first year.

• No because interest rates can vary.

Which yields more money, (a) an amount invested for 6 years at an annual yield of 5%, or (b) the same amount invested for 3 years at an annual yield of 10%?

• A

• B

A newborn child receives a $20,000 gift toward a college education from her grandparents. How much will the $20,000 be worth in 17 years if it is invested at 7% and compounded quarterly?

Mathematical Equivalence

ON

If an investment company pays 6% compounded semiannually, how much should you deposit now to have $10,000 5 years from now?

Mathematical Equivalence

ON

If you have $3,500 after 10 years on an investment that pays 5.3% compounded daily, what was the principal you started with?

Mathematical Equivalence

ON

A $175,000 loan compounded monthly at 3.2% for 19 years. How much interest was earned?

Mathematical Equivalence

ON

Your savings account has a balance of $2513.45. You opened the account 3 years ago. Interest on the account is compounded weekly at an annual interest rate of 4.35%. How much did you invest originally?

Mathematical Equivalence

ON