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Compound Interest, SMB-026 MC

$10 000 is invested for five years. Interest is earned at a rate of 8% per annum, compounding quarterly.

Which one of the following calculations will give the total interest earned, in dollars, by this investment?

  1. `10\ 000 xx 1.02^5-10\ 000`  
  2. `10\ 000 xx 1.02^20-10\ 000`  
  3. `10\ 000 xx 1.08^5 -10\ 000`
  4. `10\ 000 xx 1.08^20-10\ 000`
Show Answers Only

`B`

Show Worked Solution

`text{Interest rate}\ (r) = \frac{8%}{4} =2% = 0.02\ text{(per quarter)}`

`text{Compounding periods}\ (n) =5 xx4=20`

`FV=PV(1+r)^n = 10\ 000(1.02)^20`

`:.\ text(Interest earned)= 10\ 000 xx 1.02^20-10\ 000`

`=>  B`