Merrie borrowed $1000 from her parents, agreeing to pay them back when she graduated from college in five years. If she paid interest compounded quarterly at 5%, how much would she owe at the end of the five years?

Question

Quizplus · Accepted Answer

The amount owed 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 ($1000), r is the annual interest rate (5% or 0.05), n is the number of times that interest is compounded per year (quarterly, so 4 times), and t is the time the money is invested or borrowed for (5 years). Plugging in the values: A = 1000(1 + 0.05/4)^(4*5) = 1000(1 + 0.0125)^(20) ≈ $1282.

Merrie Borrowed $1000 from Her Parents, Agreeing to Pay Them