Suppose you invest $1,050 in an account paying 7% interest per year. a. What is

Question

Suppose you invest $1,050 in an account paying 7% interest per year. a. What is the balance in the account after 4 years? How much of this balance corresponds to "interest on interest"? b. What is the balance in the account after 31 years? How much of this balance corresponds to "interest on interest"? a. What is the balance in the account after 4 years? The balance in the account after 4 years is s (Round to the nearest cent.) How much of this balance corresponds to "interest on interest"? The amount that corresponds to interest on interest is $ . (Round to the nearest cent.)

Explanation / Answer

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

a.

A=$1050*(1.07)^4

=$1050*1.31079601

=$1376.34(Approx)=balance in account after 4 years

Total interest=A-P

=$1376.34-$1050

=326.34

Interest on original deposit=$1050*7%*4

=$294

Hence interest on interest =326.34-$294

=$32.34(Approx).

b.

A=$1050*(1.07)^31

=$1050*8.145112896

=$8552.37Approx)=balance in account after 31 years

Total interest=A-P

=$8552.37-$1050

=7502.37

Interest on original deposit=$1050*7%*31

=$2278.5

Hence interest on interest  =7502.37-$2278.5

=$5223.87(Approx).

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