Compound Interest

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Compound Interest

by datonman » Wed Feb 11, 2015 11:23 am
Is there a better way to answer this question?

Matt is planning to buy a car in three years. He wants to invest $5000 now and hopes to have $6000 to spend on the car when he buys it. What kind of interest rate would he need if his investment is compounded monthly?

A solution to this problem would be:

I used the formula like so: A=p(1+r/n)^nt

*6000=5000(1+r/12)^12 times 3
*6000=5000(1+r/12)^36
-divide sides by 5000

^1/36(1.2)=((1+r/12)^36)^1/36

1+r/12=1.00508
subtracting both sides by 1

r/12=0.00508
then multiply both sides by 12

r=approx 0.061 or 6.1%

is there a better way to solve this question?

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by Brent@GMATPrepNow » Wed Feb 11, 2015 11:31 am
datonman wrote:Is there a better way to answer this question?

Matt is planning to buy a car in three years. He wants to invest $5000 now and hopes to have $6000 to spend on the car when he buys it. What kind of interest rate would he need if his investment is compounded monthly?

A solution to this problem would be:

I used the formula like so: A=p(1+r/n)^nt

*6000=5000(1+r/12)^12 times 3
*6000=5000(1+r/12)^36
-divide sides by 5000

^1/36(1.2)=((1+r/12)^36)^1/36
Should be: (1.2)^(1/36)=((1+r/12)^36)^1/36


1+r/12=1.00508
subtracting both sides by 1

r/12=0.00508
then multiply both sides by 12

r=approx 0.061 or 6.1%

is there a better way to solve this question?
What's the source of this question?
What are the answer choices?
You've set things up correctly, but the GMAT would never require you to evaluate (1.2)^(1/36)

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Brent
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by [email protected] » Wed Feb 11, 2015 12:00 pm
Hi datonman,

Brent is correct - the GMAT would never ask you to calculate this complex of a result. The question would also include the answer choices, so you could use them to your advantage and likely avoid the big calculation entirely.

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by DavidG@VeritasPrep » Sun Feb 15, 2015 3:25 am
Often, compound interest questions on the GMAT are less about calculations than they are about a conceptual understanding. See the attached data sufficiency question, which, at first glance, looks significantly more harrowing than it is
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