Suppose that P dollars in principal is invested in an account earning 3.2% interest compounded continuously. At the end of 5 yr, the amount in the account hasearned $1388.09 in interest.Part: 0 / 2Part 1 of 2(a) Find the original principal. Round to the nearest dollar. (Hint: Use the model A = Pe' and substitute P+1388.09 for A.)The original principal was approximately S

Answered: Suppose that P dollars in principal is…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Suppose that P dollars in principal is invested in an account earning 3.2% interest compounded continuously. At the end of 5 yr, the amount in the account has
earned $1388.09 in interest.
Part: 0 / 2
Part 1 of 2
(a) Find the original principal. Round to the nearest dollar. (Hint: Use the model A = Pe' and substitute P+1388.09 for A.)
The original principal was approximately S

Expert Solution

Step 1

When interest is compounded continuously, it means that the interest is calculated on the amount that is initially invested and it is reinvested into the account's existing balance. The principal is the amount that is originally invested. The rate of interest is the rate at which the compounding is done. The time period refers to the time for which the investment is made. This is different from simple interest in the fact that simple interest calculates interest on the principal amount alone. Compound interest is calculated on the principal amount as well as the reinvested interest amount.

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