Question

An investment of $2,000 is earning interest at the rate of 6.2% compounded quarterly over 5 years. Approximately how much interest is earned on the investment?
a.
$724.67
b.
$2127.72
c.
$720.37
d.
$2720.37

Answer 1

Let:
 
P be the initial amount of money called the Principal, 

compounded n times a year, with an r annual interest rate, then after 

t many years, the amount of money A is given by the formula:


$A=P(1+ \frac{r}{n} )^{nt}$


Remark
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r is generally a percentage like 3%, 7% etc and are applied in the formula as 0.03, 0.07..., 

the interest is compounded generally annually (n=1), quarterly (n=4), monthly (n=12), etc...

t is in years,

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Thus, in our problem, P=$2,000, r=6.2%=0.062, n=4, t=5

Applying the formula:


$A=P(1+ \frac{r}{n} )^{nt}$

$A=2,000* (1+ \frac{0.062}{4} )^{4*5}=2,000(1.0155)^{20}$

$=2,000*1.3602=2720.4$


2720.4-2000=720.4 ($)

Answer: 

c.
$720.37