Question

Donna opens a certificate of deposit (CD) with $2,000. The bank offers a 3% interest rate. If the account compounds quarterly, which of the following equations represents the future value of the account, after 1 year?

Answer 1

1) Quaterly interes = 3% / 4 = 0.03 / 4

2) Values:

after 1 quarter: 2000 (1 + 0.03/4)

after 2 quarters: 2000 (1 + 0.03/4)^2

after 3 quarters: 2000 (1 + 0.03/40^4

after 4 quarters = 2000 (1 + 0.03/4)^4

You could have used the future value formula directly:

A = C * (1 + r/n) ^ n*t

where r = 3% = 0.03

n = number of periods in a year: 4

t = number of years = 1

C = initial investment = 20000

=> A = 2000 (1 + 0.03/4)^4

Answer: option D. A = 2000 ( 1 + 0.03 /4) 4