Question

Johnnys parents were given a savings bond when he was born to help with college. The bond received 8.9% interest, compounded quarterly. When they withdrew the money when johnny was 18 years old, they had $20000. How much money was the savings bond initially worth when purchased?

Answer 1

Compound interest formula: Amount = Principal(1 + Rate/number of compound per year)^(number of compound per year * number of years)

Fill in what is known:

20,000 = Principal ( 1 + 0.089/4)^(4*18)

Solve for principal:

20,000 = Principal (1.02225)^72

20,000 = Principal * 4.8765489

Divide both sides by 4.8765489:

Principal = 20,000 / 4.8765489

Principal = $4101.26