Question

How much must you deposit in an account that pays 6.25% interest, compounded annually, to have a balance of $700 after two years?
= $

Answer 1

The compound interest is applied to the remaining balance in the account

each subsequent year.

• The amount that must be deposited is approximately $620.07

Reasons:

The given compound interest rate, r = 6.25% = 0.0625

The balance in the account after 2 years, A = $700

Required:

The required deposit, P, that gives the given account balance after 2 years.

Solution:

The following is the compound interest formula to use;

• $A = \mathbf{P \times \left(1+r \right)^{ t}}$

Where;

t = 2 years

We get;

$\displaystyle P = \mathbf{ \frac{A}{(1 + r)^t}}$

Which gives;

$\displaystyle P = \frac{700}{(1 + 0.0625)^2} \approx \mathbf{620.07}$

• The amount that must be deposited to give $700 after 2 years is P ≈ $620.07

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