A savings account pays 1% annual interest, compounded daily. When interest is compounded daily, the interest owed is calculated every day and added to the account. The initial investment is $2000. The money is kept in the savings account for two years. Choose the best estimate for the value of the investment after two years.
A) $2012
B) $2112
C) $2240
D) $2040

Question

Quizplus · Accepted Answer

The formula for compound interest is A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest, P is the principal amount (initial investment), r is the annual interest rate (decimal), n is the number of times that interest is compounded per year, and t is the time the money is invested for in years. For this problem, P = $2000, r = 0.01, n = 365 (since the interest is compounded daily), and t = 2. Plugging these values into the formula gives an amount that is a bit more than $2040, making D the best estimate.

A Savings Account Pays 1% Annual Interest, Compounded Daily