Question

Sergio has decided to diversify his investments in the following way: $4,000 in an account earning 3. 2% simple interest $4,000 in a savings account earning 2. 1% interest compounded annually $7,500 in a certificate of deposit earning 5% interest compounded quarterly How much total interest will Sergio earn on his investments at the end of 4 years? a. $1,240. 82 b. $2,123. 90 c. $2,497. 17 d. $2,507. 90.

Answer 1

The total interest earned at the end of 4 years is $2,507. 90.

The formula for determining simple interest is: Principal x interest rate x time

$4000 x 3.2% x 4 = $512.

The formula for determining interest with compounding is: future value - amount invested.

The formula for calculating future value:

FV = P (1 + r/m)^nm

• FV = Future value  
• P = Present value  
• R = interest rate  
• m = number of compounding
• N = number of years  

Future value of the savings account = $4000 x (1.021)^4 = $4346.73

Interest = $4346.73 - $4000 = $346.73

Future value of the certificate of deposit = $7500 x (1.0125)^16 = $9149.17

Interest = $9149.17 - $7500 = $1649.17

Total interest =  $1649.17 + $346.73 + $512. = $2,507. 90.

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