How do i solve compound interest questions like this?

Question

How do i solve compound interest questions like this? Do I just use the compound interest formula directly?

If I have lets say $500 in a savings account for 5 years and it earns 2.5% Annual equivalent rate compounded monthly. How much will I have now?

Or should I use the Annual equivalent rate formula for compounding monthly?

score 1 · Accepted Answer · answered Jan 28 '16 at 12:21

1

If you gain $2.5\%$ in one year, you gain $0.21\%$ per month.

You can calculate the amount of money you have $x$ with:

$x=x_0g^{t/\tau}$, with $x_0$ your starting amount, $g$ the growth factor, and $\tau$ is the timescale.

If you calculate in years, $\tau = 1$ year, $g=1.025$, for months: $\tau = 1$ month, $g=(1.025)^\frac{1}{12}$

answered Jan 28 '16 at 12:21

Mike Jordan

But I don't know what to do next. How should I calculate in 5years time – john scott Jan 28 '16 at 12:29
for that, t=5 years, then fill in the formula. I can't tell you anymore without spoiling the answer, but if that is what you want, tell me so. – Mike Jordan Jan 28 '16 at 12:58
Thanks a lot. I got 565.70. Is that correct? – john scott Jan 28 '16 at 13:04
That is the same as I got, nice. – Mike Jordan Jan 28 '16 at 13:09
Appreciate the help – john scott Jan 28 '16 at 13:17

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