Question

Select the correct answer.

Answer 1

The future value of $1,000 invested at 8% compounded semiannually for five years is $\bold{\ 1,480}$

Solution:

$\bold{A = P (1 + i )^{n}}$ ----------- equation 1

A = future value  

P= principal amount  

i = interest rate

n = number of times money is compounded  

P = 1000

i = 8 %

$\mathrm{n} = \text { compounding period } \times \text {number of years}$

(Compounding period for semi annually = 2)

$\mathrm{n} = \text { compounding period } \times \text {number of years}$

Dividing “i” by compounding period

$i = \frac{8 \%}{2} = 0.04$

Solving for future value using equation 1

$\begin{array}{l}{A = 1000(1 + 0.04)^{10}} \\\\ {=1000 (1.04)^{10}}\end{array}$

$= 1480.2$

$\approx 1,480$