Alicia invested $50,000 . Each year, 9% of the current year's account value is earned in interest (compound interest). (a) What growth factor will be used to calculate the amount of interest each year?
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The problem states that Alicia earns 9% interest each year. Show more…
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Supreeta N.
An equation of the form y = 5000(1.09)x provides an example of interest compounded annually. This means that the full 9% of interest is added to the account at the end of one year. This doesn't sound very fair to someone that invests their money for 11 months - they get no interest at all. This became a competitive disadvantage for financial institutions and some began to divide the annual interest into periodic shares so that (for example) you could get 1/12th of that 9% each month. When this happens, we say that interest is compounded monthly. Interest can also be compounded weekly (52 times per year), quarterly (4 times per year), daily (365 times per year), or really any other period you could think of. If interest is compounded monthly, what growth factor would be needed to provide 1/12th of 9% interest each month? (Think about the difference between interest rate and growth factor.) The growth factor would be .
Sri K.
A savings account with interest compounded daily and an APR of 8% increases in value each year by a factor of
Donna D.
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