You deposit $100 in a bank for a fixed 7 year term.Interest on the deposit is calculated every half-year (m = 2)at the rate of 5% per half-year (i/m = 5%).Because the term is fixed,you are not allowed to withdraw interest at any point.You earn interest in the final compounding period of the term.How much of that interest is earned off of earlier interest (as opposed to earned off of the principal)?
A) $4.43
B) $9.43
C) $4.90
D) $5.00
E) $9.90

Question

Quizplus · Accepted Answer

Step 1 - Calculate the future value at the end of the period.
FV = PV × 11ea7fdb_fc28_d06f_a768_f793be4004f1_TB2902_00 FV = 100 × (1.05 11ea7fdb_fc28_f780_a768_1d1fd5a4a797_TB2902_00 = $188.56
Using a financial calculator:
N = 13, I/Y = 5, PV = -100, PMT = 0, cpt FV = $188.56
Step 2 - Find how much interest has been earned.
188.56 - 100 = $88.56
Step 3 - Calculate how much interest will be earned off of that interest.
88.56 × .05 = $4.428 or $4.43

You Deposit $100 in a Bank for a Fixed 7