Question

Carson has $20 in a savings account. The interest rate is 5%, compounded annually.To the nearest cent, how much interest will he earn in 2 years?

Answer 1

To calculate how much interest will he earn in 2 years we can use the following formula:

$A=P(1+r)^t$

Where A is the amount of money in the account after t years, P is the initial deposited amount and r is the interest rate in decimal form.

From the given information we know that r equals 0.05 (5%), P equals $20 and t equals 2 years, by replacing these values into the above formula, we get:

$\begin{gathered} A=20(1+0.05)^2 \\ A=22.05 \end{gathered}$

Then, after 2 years there will be $22.05 in the account. The interest earned can be calculated by subtracting the initial amount of money ($20) from the amount of money in the account after 2 years ($22.05), like this:

Earned interest = 22.05 - 20 = 2.05

Then, he will earn $2.05 in 2 years