A student borrows $800 at 5.3% annual interest compounded semiannually. How much does he owe after 4 years?
2 Answers
Explanation:
For this type of question, we would use Compound Interest which is gaining interest continuously over a certain amount of years, instead of working them all out separately. The formula for Compound Interest is:
Where
Plugging in values:
We change this to
Plugging into calculator:
Rounding to 2 d.p:
Minusing the before value from the after value:
Rounding to 2 decimal places gives
Explanation:
Note that 'semiannually' means twice per year. So each year has 2 calculation cycles
You have to 'split up' the annual percentage into a proportion that reflects the calculation cycle.
So the annual interest of
The general form for this context is
where
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The amount owed is
Rounding to 2 decimal places gives