Suppose an investor deposits $2500 in an interest-bearing account at her local bank. The account pays 2.5% interest compounded annually. If the investor plans on withdrawing the original principal plus accumulated interest at the end of 7 years, what is the total amount that she should expect to receive assuming interest rates do not change?
A) $2,971.71
B) $2,974.89
C) $3,532.43
D) $11,920.93

Question

Quizplus · Accepted Answer

The total amount can be calculated using the formula for compound interest: A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest, P is the principal amount ($2500), r is the annual interest rate (2.5% or 0.025), n is the number of times that interest is compounded per year (1, since it's compounded annually), and t is the time the money is invested for (7 years). Plugging in the values: A = $2500(1 + 0.025/1)^(1*7) = $2500(1.025)^7 ≈ $2,971.71.

Suppose an Investor Deposits $2500 in an Interest-Bearing Account at Her