Suppose an account promises interest at the rate of 5% the first two years and then increases 100 basis points thereafter. If $1,000 is deposited in the account today, the balance in the account at the end of 10 years from today if you make no withdrawals is closest to:
A) $1,000.00
B) $1,628.89
C) $1,757.22
D) $1,790.85

Question

Quizplus · Accepted Answer

The interest rate for the first two years is 5%, and then it increases by 100 basis points (or 1%) to 6% for the remaining years. To calculate the future value of the $1,000 deposit, we apply the compound interest formula for each period. For the first two years at 5%, the calculation is $1,000 * (1 + 0.05)^2. For the next eight years at 6%, the calculation is the result from the first two years compounded at 6% for eight years, or [ $1,000 * (1 + 0.05)^2 ] * (1 + 0.06)^8. This gives a future value of approximately $1,757.22.

Suppose an Account Promises Interest at the Rate of 5