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5.7 An account was opened with $1,000 ten years ago. Today, the account balance is $1500. If the account paid interes compoun
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Answer #1

Correct Answer: A. $86.20

Initial Deposit (P) = $1,000

Period in years(n) = 10

Current Account balance (A) = $1,500

Interest rate = r

Putting the values to compounding interest formula to find interest rate:

P*(1+r) = A

1000 *(1+r)10 = 1500

T = 1.51/10 - 1

r = 0.0413797

Total interest earned in 10 years = 1500-1000 = $500

Simple interest earned in 10 years:

= 1000 * 0.0413797*10

= 413.80

Thus, Interest earned on Interest

= 500 -413.80

= $86.20

Please note:

Total compound interest = Simple interest + Interest earned on interest

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.

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