Question

3. You want to have $4000 in your savings account after 2 years. Find the amount you should deposit for each of the situations described below. a. The account pays 3% annual interest compounded monthly. b. The account pays 4% annual interest compounded continuously.​

Answer 1

Answer:

Part A)

About $3767.34.

Part B)

About $3692.47.

Step-by-step explanation:

Part A)

Recall that compound interest is given by the formula:
$\displaystyle A = P\left(1+\frac{r}{n}\right)^{nt}$

Where A is the final amount, P is the initial amount, r is the interest rate, n is the number of times compounded per year, and t is the number of years.

To obtain $4000 after two years, let A = 4000 and t = 2.

Because the account pays 3% interest compounded monthly, r = 0.03 and n = 12.

Substitute and solve for P:

$\displaystyle \begin{aligned} (4000) & = P\left(1+\frac{(0.03)}{(12)}\right)^{(12)(2)} \\ \\ P & = \frac{4000}{\left(1+\dfrac{(0.03)}{(12)}\right)^{(12)(2)}} \\ \\ & \approx \ 3767.34\end{aligned}$

In concluion, about $3767.34 should be deposited.

Part B)

Recall the formula for continuous compound:

$\displaystyle A = Pe^{rt}$

Where e is Euler's number.

Hence, let A = 4000, r = 0.04 and t = 2. Substitute and solve for P:

$\displaystyle \begin{aligned}(4000) & = Pe^{(0.04)(2)} \\ \\ P & = \frac{4000}{e^{(0.02)(4)}} \\ \\ & \approx \ 3692.47 \end{aligned}$

In conclusion, about $3692.47 should be deposited.