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”?

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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)?

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