An investment today of $2850 will earn 1.5% compounded monthly for the first 2.5 years and 1.75% compounded semi-annualy for the next three years.find the total interest earned?
Answers
Answer:
Suppose you make an investment of Rs.50,000 in a fixed deposit for 5 years at 10%, the interest earned for the first year will be Rs.5000.
However, for the second year, the principal will not be Rs.50,000, but the accumulated interest amount, plus the principal. This means that the principal will be Rs.50,000 + Rs.5000 = 55,000.
Second year principal = Previous year’s principal + Interest earned, which is Rs.50,000 + Rs.5,000 = Rs.55,000. It is clearly seen here that the interest is added back to the principal amount to calculate interest for the following years. This is nothing but compounding.
The below table illustrates how interest is earned when the interest is compounded.
Principal Year Interest earned
Rs.50,000 1 Rs.5000
(Rs.50,000 + Rs.5000) Rs.55,000 2 Rs.5,550
(Rs.55,000 + Rs.6055) Rs.60,550 3 Rs.6055
(Rs.60,550 +Rs.6055) Rs.66,605 4 Rs.6,660.5
(Rs.66,605 + Rs.6,660.5) Rs.73,265.5 5 Rs.7,326.55