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Compound interest

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by LulaBrazilia » Tue Dec 10, 2013 11:35 am
If $1 were invested at 8 percent interest compounded annually, the total value of the investment, in dollars, at the end of 6 years would be

A) (1.8)^6

B) (1.08)^6

C) 6(1.08)

D) 1 + (0.08)^6

E) 1 + 6(0.08)


I tend to confuse compound and simple interest, and how to find the total vs just the interest.
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by Patrick_GMATFix » Tue Dec 10, 2013 12:01 pm
Hope this helps. My signature below has more info.

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Compound interest

by Brent@GMATPrepNow » Tue Dec 10, 2013 1:30 pm
LulaBrazilia wrote:If $1 were invested at 8 percent interest compounded annually, the total value of the investment, in dollars, at the end of 6 years would be

A) (1.8)^6
B) (1.08)^6
C) 6(1.08)
D) 1 + (0.08)^6
E) 1 + 6(0.08)
You can use this formula to calculate compound interest:
Final balance = P( 1 + r/c)^nc where:
P = the principal (the initial investment)
r = the annual interest rate expressed as a decimal
c = the number of times the interest is compounded each year
n = the number of years the investment collects interest

For this question, P = $1, r = 0.08, c = 1, n = 6
So, the FINAL BALANCE = 1( 1 + 0.08/1)^[(6)(1)]
= (1.08)^6
= B

Cheers,
Brent
Last edited by Brent@GMATPrepNow on Thu Oct 12, 2017 2:55 pm, edited 1 time in total.
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by Abhishek009 » Wed Dec 11, 2013 7:56 am
LulaBrazilia wrote:If $1 were invested at 8 percent interest compounded annually, the total value of the investment, in dollars, at the end of 6 years would be

A) (1.8)^6

B) (1.08)^6

C) 6(1.08)

D) 1 + (0.08)^6

E) 1 + 6(0.08)


I tend to confuse compound and simple interest, and how to find the total vs just the interest.
CI = P( 1 +R/100)^N

*In this case P = 1 , R = 8 , N = 6


Hence Ci will be = 1(1 + 8/100)^6

1(1+0.08)^6 = (1.08)^6
Abhishek
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by Jeff@TargetTestPrep » Thu Dec 14, 2017 3:40 pm
LulaBrazilia wrote:If $1 were invested at 8 percent interest compounded annually, the total value of the investment, in dollars, at the end of 6 years would be

A) (1.8)^6

B) (1.08)^6

C) 6(1.08)

D) 1 + (0.08)^6

E) 1 + 6(0.08)
Using the compound interest formula, we have:

future value = present value(1 + rate/n)^nt

(in which n = number of compounding periods in a year and t = total number of years)

future value = 1(1 + 0.08/1)^(1)(6)

future value = (1.08)^6

Answer: B

Jeffrey Miller
Head of GMAT Instruction
[email protected]

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by Brent@GMATPrepNow » Sat Jan 13, 2018 9:17 am
LulaBrazilia wrote:If $1 were invested at 8 percent interest compounded annually, the total value of the investment, in dollars, at the end of 6 years would be

A) (1.8)^6

B) (1.08)^6

C) 6(1.08)

D) 1 + (0.08)^6

E) 1 + 6(0.08)
You can use this formula to calculate compound interest:
Final balance = P( 1 + r/c)^nc where:
P = the principal (the initial investment)
r = the annual interest rate expressed as a decimal
c = the number of times the interest is compounded each year
n = the number of years the investment collects interest

For this question, P = $1, r = 0.08, c = 1, n = 6
So, the FINAL BALANCE = 1( 1 + 0.08/1)^[(6)(1)]
= (1.08)^6

Answer: B

Cheers,
Brent
Brent Hanneson - Creator of GMATPrepNow.com
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