- How much interest would you earn if you invested $1,000 at 8% annually compounded interest for 5 years?
- Suppose you put $5,000 into a retirement account that earned 9% annually compounded interest. How much would
your account be worth in 10 years? In 20 years? In 40 years? (Assume that you make no additional deposits into the
account.) - Ken took out a personal loan for $2,500. Interest on this loan compounds annually at a rate of 12¾%. If he pays the
loan off in its entirety 5 years later, how much total interest will he have paid? - If your great-great-great-great-great-great-great-great grandfather had invested $5 at 8% annually compounded
interest 200 years ago, and his account had been passed down from generation to generation without any additional
deposits or withdrawals, how much would the account be worth today?
C. Using the Compound Interest Formula for PV
- How much would you need to deposit today into an account paying 6.52% annually compounded interest in order to
have $5,000 in 3 years? - Jake’s bank statement shows that he has $4,268.97 in a CD that he opened 4 years ago. The account’s interest rate
has been 5.04% compounded annually. How much did he originally deposit? - Marisol wants to set up an account for her newly born granddaughter, in the hopes that with compound interest it will
grow to $1,000,000 by the time her granddaughter is 70 years old. Assuming that this account will earn 5% annually
compounded interest, how much should Marisol deposit? How much total interest would the account earn? What if the
account instead earns 10% compounded annually? - Find the PV if the FV $4,250, the rate is 5.67% compounded annually, and the term is 6 years.
- Determine the present value if the future value is $300, the interest rate is 11^5 ⁄ 8 % compounded annually, and the term
is 10 years.
D. The Rule of 72
In each of the following problems, use the Rule of 72 to obtain an approximate answer.
- How long will it take to double your money at an annually compounded interest rate of (a) 1%, (b) 2%, (c) 4%, (d) 6%,
(e) 8%, (f) 12%? - I have $1,000 in an account which pays 5.45% annually compounded interest. Assuming this interest rate does not
change, how long will it take for my account to grow to $2,000?
98 Chapter 3 Compound Interest