Answer:
$224.64
Explanation:
Norman invested $100,000, Interest rate 12%, Period 3 years
In compound account, the interest earned by the end of the year qualifies to earn interest. At the end of the period, the interest is added to the principal and earns interest as well.
The interest that Norman earned in the first year was added to the principal amount in the second year, meaning that interest earned some interest in the second and their year of investment. The same happened to the interest earned in the second year.
To calculate the interest earned by the interest, we take the amount after three years, minus the principal amount, minus the simple interest for the three years.
Interest on interest will be the Future value- principal amount- Simple interest.
The amount after three is the compounded value after three years.
compound amount formula FV= PV × (1+r)n
Future value of $100,00 @ 12% after 3 years will be
=5000 x (1+12/100) 3
=5000 x (1+0.12)3
=5000 X (1.12)3
=5000 x 1.404928
=7,024.64
The simple interest earned in the three years equal
Interest = principal x rate x duration
12/100 x 5000 x 3
=0.12 x 5000 x 3
=600 x 3
=$1800
Interest on interest will be :
=$7,024.64 - $5,000- $1,800
=$224.64
