In the question shown in the image, does the question mean that there will be a total increase of $4\%$ each year to the amount in the bond?
So will the answer be $450 \cdot (1.04)^5 = £547.49$ (to the nearest pence)
Asked
Active
Viewed 36 times
1
-
Why are you using 1.04 instead of 1.02? – Keatinge Jul 02 '18 at 01:37
-
I am using 1.04 because the question mentions 2% twice. Is my understanding incorrect? – mku Jul 02 '18 at 01:42
1 Answers
1
The answer would be
$$ 450 * 1.02^5 \approx 496.84 $$
At the end of the year they add 2%, which is the same as multiplying by 1.02, this happens for 5 years so you multiply by 1.02 5 times, which is 1.02^5
Keatinge
- 251
-
So when the questions mentions 2% again in the brackets, is that just a clarification of what was mentioned before the brackets? Meaning, we don't do 2% + 2% but rather, the second mentioning of the 2% is just to clarify the first 2%? – mku Jul 02 '18 at 01:46
-
@mku Yeah that's correct, they are just defining what they mean by compound interest – Keatinge Jul 02 '18 at 01:47
-