Shawn Bowker invested $10,000 in a money market account that will pay an annual interest rate of 5.75 percent compounded daily. How much will the interest on interest be after two years?

Question

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The interest on interest, or compound interest, can be calculated using the formula for compound interest: A = P(1 + r/n)^(nt) - P, where A is the amount of money accumulated after n years, including interest, P is the principal amount ($10,000), r is the annual interest rate (5.75% or 0.0575), n is the number of times that interest is compounded per year (daily, so 365), and t is the time the money is invested for in years (2 years). First, calculate the total amount after 2 years and then subtract the principal and the simple interest to find the interest on interest. Simple interest for 2 years would be P*r*t = $10,000*0.0575*2 = $1,150. Total compound interest can be calculated as follows: A = $10,000(1 + 0.0575/365)^(365*2) ≈ $11,218.63. Subtracting the principal and the simple interest from this gives the interest on interest: $11,218.63 - $10,000 - $1,150 = $68.63.

Shawn Bowker Invested $10,000 in a Money Market Account That