Why is the amount of interest earned less than half amount

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Reference no: EM131881367

a. Calculate the future value of $8,000 in 5 years at an interest rate of 6% per year.

The future value of $8,000 in 5 years at an interest rate of 6% per year is $ ? (round to nearest dollar)

b. Calculate the future value of $8,000 in 10 years at an interest rate of 6% per year.

The future value of $8,000 in 10 years at an interest rate of 6% per year $? (round to nearest dollar)

c. Calculate the future value of $8,000 in 5 years at an interest rate if 12% per year.

The future value of $8,000 in 5 years at an interest rate of 12% per year is $? (round to nearest dollar)

d. Why is the amount of interest earned in part (a) less than half the amount of interest earned in part (b)? (see selection below)

A. The annual interest rate in part (b) is slightly higher than the rate assumed in part (a). This is becuse of compunding.

B. The amount of interest earned in part (a) is really half of the amount of interest earned in part (b) since in part (b) the money grows for twice as many years as in part (a).

C. The interest earned in part (a) is based on a lowr effective annual interest rate.

D. This results because you earn more interest on past interest. As interest is earned on the increasing amount of accumulated interest, the money grows faster as time goes on.

Reference no: EM131881367

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