Power of Compounding a You borrowed 1000 from a loan shark a

Power of Compounding

a. You borrowed $1,000 from a loan shark at 5% monthly interest. How much do you owe four years later?

c. You are now 25 and plan to retire at age 65. You want to start saving so that you can build a nest egg of $1 million. How much should you save each month? Assume that your savings will be earning 10% interest each year, compounded monthly

Solution

STEP 1: To find amount we use formula:

A=P(1+rn)n?t

In this example we have

P=$1000 , r=5% , n=12 and t=4 years

After plugging the given information we have

AAAA=1000(1+0.0512)12?4=1000?1.00416748=1000?1.220915=1220.92

STEP 2: To find interest we use formula A=P+I, since A=1220.92 and P = 1000 we have:

A1220.92II=P+I=1000+I=1220.92?1000=220.92