Suppose you invest $ 850 in an account paying 7 % interest per year. a. What is the balance in the account after 2 years? How much of this balance corresponds to "interest on interest"? b. What is the balance in the account after 35 years? How much of this balance corresponds to "interest on interest"?

Answer and Explanation:

a. The computation of balance in the account after 2 years is shown below:-

Balance in account in 3 years = Future value = Present value (1+ interest rate)^No of years

= 850 × (1 + 7%)^2

= 973.165

Total compounded Interest = 973.165  - 850

= 123.165

Total Simple Interest = 850 × 0.07 × 2

= 119

Balance corresponds to the interest on interest = Total compounded Interest - Total simple interest

= 123.165 - 119

= 4.165

b. The computation of balance in the account after 35 years and balance corresponds to "interest on interest" is shown below:-

Future value = Present value (1+ interest rate)^No of years

= 850 × (1 + 7%)^35

= 9,075.094262

or

= 9,075.09

Total compounded Interest = 9075.09  - 850

= 8,225

Total Simple Interest =  850 × 0.07 × 35

= 2082.5

Balance corresponds to the interest on interest = Total compounded Interest - Total simple interest

= 8,225 - 2,082.5

= 6,142.5

you will have $2593.74 in 10 years if you set aside $1,000 at 10%

you will have $9321.91 in 20 years if you set aside $2000 at 8%

you will have $1469.32 in 5 years if you set aside $1000 at 8%

you will have $1296.87 in 10 years if you set aside $500 at 10%

you will have $239.66 in 15 years if you set aside $100 at 6%

you will have $4660.96 in 20 years if you set aside $1000 at 8%