Question

Interest rates fluctuate with the economy. In the 1980s, the highest CD interest rate was over 16%. By 2009, the highest CD interest rates were approximately 5%.
a. If $1,000 is invested at 16% interest, compounded continuously, for five years, what is the ending balance?
b. If $1,000 is invested at 5% interest, compounded continuously, for five years, what is the ending balance?
c. What is the difference between the two ending balances?

Answer 1

a.FV=P*e^rt where FV=future value, P=principal, r=interest rate, and t=time. So:
FV=1000*e^.16*5=1000*2.2255409284924676045795375313951=$2225.54
b.FV=1000*e^.05*5=$1284.03
c.2225.54-1284.03=$941.51
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