Justin invests $4,000 in a savings account for two years. The account pays 2% interest compounded annually. How much interest income will Justin earn on this investment?
A) $81.60
B) $160.00
C) $80.00
D) $161.60

Question

Quizplus · Accepted Answer

The interest is compounded annually, so the formula for compound interest is A = P(1 + r/n)^(nt). Here, P = $4,000, r = 0.02, n = 1, and t = 2. The total amount A after 2 years is $4,000(1 + 0.02)^2 = $4,000 * 1.0404 = $4,161.60. The interest earned is $4,161.60 - $4,000 = $161.60.

Justin Invests $4,000 in a Savings Account for Two Years