Compounding with Different Interest Rates A deposit of $500 earns the following interest rates:
5 percent in the first year
6 percent in the second year,and
8 percent in the third year.
What would be the third year future value?
A)$527.14
B)$595.00
C)$601.02
D)$1595.00

Question

Quizplus · Accepted Answer

To calculate the future value of the deposit, we need to compound each year's interest separately.

After the first year, the deposit will be worth:

$500 x 1.05 = $525

After the second year, the deposit will be worth:

$525 x 1.06 = $556.50

Finally, after the third year, the deposit will be worth:

$556.50 x 1.08 = $601.02

Therefore, the answer is C, $601.02, for the third year future value.

Compounding with Different Interest Rates a Deposit of $500 Earns