Compounding with Different Interest Rates A deposit of $1,000 earns the following interest rates:
8 percent in the first year
7 percent in the second year,and
8 percent in the third year.
What would be the third year future value?
A)$1,082.15
B)$1,230.00
C)$1,248.05
D)$,3030.00

Question

Quizplus · Accepted Answer

Using the formula for compound interest:

FV = PV * (1 + r)^n

where FV is the future value, PV is the present value, r is the interest rate, and n is the number of time periods.

For the first year, 
FV = 1,000 * (1 + 0.08)^1 = 1,080

For the second year, 
FV = 1,080 * (1 + 0.07)^1 = 1,159.60

For the third year, 
FV = 1,159.60 * (1 + 0.08)^1 = 1,248.05

Therefore, the third year future value is $1,248.05.

The best choice is C.

Compounding with Different Interest Rates a Deposit of $1,000 Earns