You invest $500 in an account that earns interest compounded monthly. Use a table or graph to find the least annual interest rate (to the nearest tenth of a percent) that the account would have to...
You invest $500 in an account that earns interest compounded monthly. Use a table or graph to find the least annual interest rate (to the nearest tenth of a percent) that the account would have to earn if you want to have a balance of $600 in 4 years.
It sounds like they want you to take a stab at what you would get in 4 years from $500 at different interest rates compounded monthly. You'll need to use the discrete compounding equation here:
`A = P(1+r/n)^(nt)`
Here, A is the future value of the money, P is the principle (original amount you put in, $500), r is the annual interest rate, n is the number of intervals in the year that you are compounding (here, 12 because monthly), and t is the number of years (4).
Plugging in all of the numbers gets you the following relation with respect to rate:
`A = 500(1+r/12)^(12*4)`
`A = 500(1+r/12)^48`
We can't very easily simplify this further, but we can use it to find the graph:
The red line is y = 600. The black line is the graph of our equation. The x-axis (rate) starts at 0.00 and goes to 0.05 (0% - 5%). The y-scale starts at 0 and goes to 700. Where the two lines intersect is where we would expect the correct rate. Based on the graph, it looks to be around 0.045 or 4.5%. Let's make a table of values around 4.5% to see if we are correct. We will plug these values in to our relationship between A and the rate and examine the result.
Rate Result in 4 years
It looks like our graph estimate was a bit off! Clearly, if you wanted $600, you would want at least 4.6% interest on your money.
As a side note, you can solve exactly for the correct rate. Follow the steps below to solve algebraically with only the estimate at the end limited by your calculator's precision.
`600 = 500 (1+r/12)^48`
`6/5 = (1+r/12)^48`
`root(48)(6/5) = 1+r/12`
`root(48)(6/5) - 1 = r/12`
`r = 12(root(48)(6/5) - 1) ~~ 0.045667 = 4.5667%`
` `Looks like we weren't too far off with 4.6% from the table!