Mr. Abban invested $1,200.00 for 3 years at 5% per annum compound interest.
Find the interest earned at the end of three years.
Method I
Compound Interest
A = P(1 + )nt
Where
A = amount
P = principal
r = rate of interest
n = number of times interest is compounded per year
t = time (in years)
n = 1 (compounded once every year)
A = P(1 + r)t
P = $1,200
r = = 0.05
t = 3
A = $1,200(1 + 0.05)3 = $1389.15
Amount earned at the end of the third year = $1389.15
Amount = Principal + Interest
Interest = Amount - Principal
Principal = $1,200
Interest earned at the end of three years = $1389.15 - $1,200
Interest earned at the end of three years = $189.15
Method II
Simple Interest
Simple Interest =
First Year
Principal = $1,200
Time = 1
Rate = 5
Simple Interest = = $60
Amount = Principal + Interest
Amount by the end of the first year = $1200 + $60 = $1260
Second Year
Principal = $1260
Time = 1
Rate = 5
Simple Interest = = $63
Amount by the end of the second year = $1260 + $63 = $1323
Third Year
Principal = $1323
Time = 1
Rate = 5
Simple Interest = = $66.15
Amount by the end of the third year = $1323 + $66.15 = $1389.15
Amount = Principal + Interest
Interest = Amount - Principal
Principal = $1,200
Interest earned at the end of three years = $1389.15 - $1,200
Interest earned at the end of three years = $189.15
