Algebra II : Interest Equations

Study concepts, example questions & explanations for Algebra II

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Example Questions

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Example Question #1 : Interest Equations

Peter opens a savings account on his 21st birthday. He makes a deposit of $5000. The account earns 7 percent interest, compounded annually.  Peter plans to take the money out when he is 50 years old.  If he doesn't make any deposits or withdrawals until then, how much money will be in the account?

Possible Answers:

Correct answer:

Explanation:

The formula for calculating compount interest is as follows:

where

= future value

= present value

= interest rate

= number of times the interest is compounded

In this problem, the present value of the money is $5000, and the interest rate is 7%. If Peter takes the money out when he is 50, it would have been compounded 29 times (once per year).  Therefore:

Example Question #2 : Applying Exponents

Catherine invests $3500 in an investment account. The account earns 10% interest, compounded quarterly. After 5 years, how much money will she have?

Possible Answers:

Correct answer:

Explanation:

The formula for calculating the future value of an interest earning account is

,

where

= future value,

= present value,

= annual interest rate,

= number of times the interest is compounded per year, and

= the number of years that have passed.

The problem asks for the amount of money in the account after 5 years, with 10% interested compounded four times per year (quarterly).

Plug in the given quantities and simplify:

Example Question #3 : Applying Exponents

Felicia put money in a saving account with a 5% interest rate, compounded annually. After five years, she had $10,000. How much was her initial investment?

Possible Answers:

Correct answer:

Explanation:

The formula for finding the future value of an investment is

,

where

= future value,

= present value,

= interest rate, and

= number of times interest is compounded.

Plug in the given numbers and solve for the present value:

Example Question #4 : Applying Exponents

Jamie deposits $5000 into an account at ABC bank. The account will earn a 4% interest rate compounded yearly. Jamie would like to withdraw the accumulated amount after 5 years and close the account. How much money would Jamie withdraw after 5 years? (Round your answer to the nearest dollar)

Possible Answers:

Correct answer:

Explanation:

Initial amount = 5000

The account earns 4% compounded yearly ===> Each $1.00 will grow into $1.04.

Growth rate = 1.04

Jamie will withdraw the money after 5 years. Since the interest is compounded yearly, the number of periods is equal to the number of years the money will be in the account.

number of periods = 5

From the above information, we can calculate the amount accumulated (or final amount) after 5 years using the following formula:

final amount = initial amount * (growth rate)number of periods

Example Question #5 : Applying Exponents

Round the answer to two decimals.

Anthony put , in his savings account today. The bank pays interest of  every year.

How much does he have in his savings account after  years?

Possible Answers:

Correct answer:

Explanation:

The formula for computing interest is:

Beginning Amount x ((1 + rate)^number of years) = Ending Amount After number of years

Make sure to convert the rate from percent to number: 3% = 0.03

So the answer is 

Example Question #6 : Applying Exponents

For coninuous compound interest:

 

 

Where

If an initial deposit of  is continuously compounded at a rate of  for  years, what will be the final principal value to the nearest dollar?

Possible Answers:

None of the other answers.

Correct answer:

Explanation:

Using the equation for continuous compound interest and the given information, we get 

     

     

     

      

 

Example Question #7 : Applying Exponents

Remember         

If an account has a starting principle P = $5,000, an interest rate r = 12% or 0.12, compounded annually, how much money should there be after five years? Assume no money has been added or taken out of the account since it was opened. 

Possible Answers:

Correct answer:

Explanation:

   is the compound interest formula where

P = Initial deposit = 5000

r = Interest rate = 0.12

n = Number of times interest is compounded per year = 1

t = Number of years that have passed = 5

  

Round to the nearest cent or hundredth is .

Example Question #8 : Applying Exponents

Julio invests $5000 into an account with a 2.5% interest rate, compounded quarterly. What is his account balance after 1 year (rounded to the nearest cent)?

Possible Answers:

Correct answer:

Explanation:

To determine Julio's account balance, we must use the interest formula given below:

where P is his principal (initial) investment, r is the interest rate (as a decimal), n is the number of times the interest is compounded, and t is the amount of time elapsed.

Plugging in all of our given information into the above formula - knowing that quarterly means four times a year - we get

Example Question #9 : Applying Exponents

Martisha invests $2000 into an account with continuously compounded interest. The account has an interest rate of 2.5%. Find the balance of the account after 2 years, rounded to the nearest cent.

Possible Answers:

Correct answer:

Explanation:

To find the balance, B, of a continuously compounded interest account after a certain amount of time, we must use the following formula:

, where P is the initial investment, r is the interest rate (as a decimal), and t is the amount of time being considered.

Plugging in all of the given information, we get

which rounded becomes $2102.54

Example Question #10 : Applying Exponents

How long will it take for Nikki to triple her initial investment into a continuously compounded interest account with an interest rate of 1.9%?

Possible Answers:

57.82 years

0.214 years

We are not given enough information to solve the problem

0.5782 years

Correct answer:

57.82 years

Explanation:

The formula to find the balance, B, of a continuously compounded interest account with interest rate, r, after a certain time, t, is given by

To solve this problem, we need to know only the initial investment (P), our final balance (three times P) and the interest rate (expressed as a decimal), 0.019.

Plugging in our known information into the formula for continuously compounded interest, we get

We now solve for t:

Exponentiating both sides allows us to get rid of the exponential:

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