Jose bought a 3000 savings bond that earns 5 percent compoun

Jose bought a $3,000 savings bond that earns 5 percent compounded interest per year. How much will his bond be worth after 3 years?

A. $3,150.00

B. $3,307.50

C. $3,348.88

D. $3,472.88

Solution

D. Simple interest problems use the formula I = prt, where I is the amount of interest, p is the principal or the amount saved or invested, r is the rate of interest, and t is the amount of time that the interest is accruing. For compounded interest problems, you need to calculate the simple interest for each year, add it to the principal and use that figure as the new principal for the next year. The process is repeated for each year. In this problem, the interest is compounded for 3 years, so you will calculate the interest three times, each time using the new principal.

Year One

Principal = $3,000

Rate = 0.05

Interest = $150

Add the interest to the principal to get $3,150.

Year Two

Principal = $3,150

Rate = 0.05

Interest = $157.50

Add the interest to the principal to get $3,307.50.

Year Three

Principal = $3,307.50

Rate = 0.05

Interest = $165.38

Add the interest to get the principal of $3,472.88,

the amount Jose would have after three years.