Question
Asked Jun 13, 2019

Consider a $5,000 deposit earning 10 percent interest per year for ten years. What is the future value? how much total interest is earned on the original deposit? and how much is interest earned on interest?

check_circleExpert Solution
Step 1

Future Value (FV)

Future value is the specific value or amount of an investment at a specific date in future with the addition of interest amount with principle amount. It considers compounding effect on interest earned periodically.

Total Interest earned on Original Deposit

It is the amount of total interest which is earned on principle value of investment (PV). It is the difference between Future Value (FV) and Investment Amount (PV).

Amount of interest earned on interest

It is the excess amount of interest on original amount of interest. It is the difference between total interest earned and original interest (simple interest) on investment.

Step 2

Given,

Investment Amount (PV) = $5,000

Interest Rate (r) = 10% = 0.10

Time Period (n) = 10 Years

Calculation for Future Value

FV = PV * (1 + r)n

    = $5,000 * (1 + 0.10)10

    = $5,000 * (1.10)10  

    = $5000 * 2.5937

             = $12,968.71

Step 3

Calculation of Total Interest earned on original deposit

Total Interest earn on original deposit = FV – PV

 = $12,968.71 - $5,000

                 &n...

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