Five years ago John Henry set aside $5,000 in a separate bank account to be used for his favourite hobby - betting on horses at the race track. This account now has a $10,000 balance. What is the approximate compound interest rate John Henry's hobby is earning?

Question

Quizplus · Accepted Answer

The formula for compound interest is A=P(1+r/n)^(nt), where A is the ending balance, P is the principal (starting balance), r is the interest rate, n is the number of times the interest is compounded per year, and t is the time in years. We know that P=$5,000, A=$10,000, and t=5 years. We don't know n, but we can assume that it is compounded annually, so n=1. We can plug in these values to solve for r:

$10,000=$5,000(1+r/1)^(1*5)
2=(1+r)^5
1.1487=1+r
r=0.1487 or 14.87%

Therefore, the approximate compound interest rate John Henry's hobby is earning is 14.4% (rounded to the nearest tenth), which corresponds to choice D.

Five Years Ago John Henry Set Aside $5,000 in a Separate