Question

Ava has $100 in a savings account. The interest rate is 5%, compounded annually.To the nearest cent, how much interest will she earn in 2 years?

Answer 1

Given:

Ava has $100 in a savings account. The interest rate is 5%, compounded annually.

so, P = 100

r = 5% = 0.05

n = 1

We will find the interset that she will earn in 2 years

So, t = 2

we will use the following formula:

$Interest(I)=P\cdot(1+\frac{r}{n})^{nt}-P$

Substitute with the given data:

$\begin{gathered} I=100\cdot(1+\frac{0.05}{1})^{1\cdot2}-100 \\ \\ I=100\cdot1.05^2-100=100(1.05^2-1)=10.25 \end{gathered}$

So, the answer will be the interest in 2 years = $10.25