Concept explainers
The model in Questions 1-3 is an example of interest compounded annually. This means that the full 6% of interest is added to the account at the end of one year. This doesn’t sound very fair to someone that invests their money for 11 months–they get no interest at all. This became a competitive disadvantage for financial institutions, and some began to divide the annual interest into periodic shares, so that (for example) you could get 1/12th of that 6% each month. When this happens, we say that interest is compounded monthly. Interest can also be compounded weekly (52 times per year), quarterly (4 times per year), daily (365 times per year), or really any other period you could think of.
How many times would this growth factor be applied in 2 years? In 5 years? In t years?
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Pathways to Math Literacy (Loose Leaf)
- Intermediate AlgebraAlgebraISBN:9781285195728Author:Jerome E. Kaufmann, Karen L. SchwittersPublisher:Cengage LearningAlgebra & Trigonometry with Analytic GeometryAlgebraISBN:9781133382119Author:SwokowskiPublisher:CengageAlgebra for College StudentsAlgebraISBN:9781285195780Author:Jerome E. Kaufmann, Karen L. SchwittersPublisher:Cengage Learning