Question

Congratulations! You won a prize in a contest! There are two choices: take the $500 prize today or wait one year and take the $500 prize a year from now. If the interest rate is 3%, compounded annually, how much interest would you be giving up if you took the prize a year from now?

Answer 1

Answer:

$15

Explanation:

The formula for calumniating compound interest is as below

A= P x ( 1 + r) ^1

For this case

A= Amount after one year

P = principal: $500

r= Interest rate 3% or 0.03

n = time in years: 1

A= $500 x ( 1 + 0.03) ^ 1

A = $500 x(1.03)

A= $500 x 1.03

A =$515

The interest missed is the future value -  amount collected after one year.

=$515- $500

=$15