Chapter 5, Problem 5.1CTF

You deposited $2,000 in a bank account that pays 5 percent simple interest. How much will you have in this account after three years?

Summary Introduction

To calculate: The future value of $2,000 after 3 years at a simple interest rate of 5 percent

Introduction:

The future value of money refers to the amount of dollars that an investment grows over a definite period at a particular rate of interest rate. In other words, it refers to the future value of present cash investments. Simple interest refers to the interest earned on the initial principal every year.

Answer to Problem 5.1CTF

The future value of $2,000 at a simple interest rate of 5 percent after three years is $2,300.

Explanation of Solution

Given information:

Person X deposits $2,000 in his bank account. The simple interest received on the account is 5 percent.

The formula to calculate the future value when the bank provides simple interest:

$\text{FV}=\text{P}\times \left[1+\left(r\times t\right)\right]$

Where,

“FV” refers to the future value

“P” refers to the principal amount invested

“r” refers to the simple rate of interest

“t” refers to the number of years or periods of investment

Compute the future value:

$\begin{array}{c}\text{FV}=\text{P}\times \left[1+\left(r\times t\right)\right]\\ =\$2,000\times \left[1+\left(0.05\times 3\right)\right]\\ =\$2,000\times 1.15\\ =\$2,300\end{array}$

Hence, the future value is $2,300.