Calculate the future value

Suppose you invest $1000 in an account paying 8% interest per year.

a. What is the balance in the account after 3 years? How much of this balance corresponds to “interest on interest”?

b. What is the balance in the account after 25 years? How much of this balance corresponds to interest on interest?

Calculate the future value of $2000 in

a. 5 years at an interest rate of 5% per year.

b. 10 years at an interest rate of 5% per year.

c. 5 years at an interest rate of 10% per year.

d. Why is the amount of interest earned in part (a) less than half the amount of interest earned in part (b)?

Solution: