An investment of $100 today is worth $121 at the end of two years if it...
An investment of $100 today is worth $121 at the end of two
years if it earns an annual interest rate of 8%. How much interest
is earned in the first year and how much in the second year of this
investment?
A) The interest earned in year one is $10.21 and the interest
earned in year two is $12.21.
B) The interest earned in year one is $10.00 and the interest
earned in year two is $11.
C) The interest earned in year one is $10.21 and the interest
earned in year two is $18.00.
D) There is not enough information to solve this problem.
Homework Answers
Let the effective annual interest rate be x
100(1+x)2 = 121
X = 10%
Hence, interest in year one = 100*10% = $10
Interest in year two = Interest in Year one + Interest earned on interest of year 1
= 10 + 10*10%
= $11
Hence, the answer is B
B) The interest earned in year one is $10.00 and the interest earned in year two is $11.
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