Question

Kristen just deposited $6,500 into a new bank account that pays 4.5% interest the first year and 3% compounded annually each year after that. If there is no other activity in the account, how much money will there be in two years ? PLEASE BRAKE DOWN THE PROBLEM!

Answer 1

This question is about compound interest, but since the interest is such a small number you can use what you know about simple interest to eliminate some answers.

You can immediately eliminate choice A as a clunker, since it is less than the original amount in the account.

Consider what the amount of interest would be if you make the rate much larger than the original rate, say 10%, or 0.1:

$6,500 × 0.1 = $650

If this amount were added to the original amount each year for two years, the total would be:

$6,500 + $650 + $650 = $6,500 + $1,300 = $7,800

This is an over-estimate for the information given, and since choices C and D are even greater than this over-estimate, they can be eliminated. That means choice B is the correct answer.

Answer 2

B is the correct answer.