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Interest

by talaangoshtari » Wed Jun 10, 2015 2:06 am
$400 is placed in an account earning an annual interest rate of %6. If the account is compounded annually, how much more interest is earned in the second year than in the first?

A. $1.22
B. $1.33
C. $1.43
D. $1.44
E. $1.54
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by GMATGuruNY » Wed Jun 10, 2015 2:32 am
talaangoshtari wrote:$400 is placed in an account earning an annual interest rate of %6. If the account is compounded annually, how much more interest is earned in the second year than in the first?

A. $1.22
B. $1.33
C. $1.43
D. $1.44
E. $1.54
First-year interest = 6% of 400 = $24.
Here, the interest is COMPOUNDED.
Implication:
In the second year, the interest will be higher because 6% is earned not only on the $400 principal (6% of $400) but also on the $24 of interest accrued in the first year (6% of $24).
Thus, the increase in interest is equal to the value in red:
6% of 24 = $1.44.

The correct answer is D.
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by Brent@GMATPrepNow » Wed Jun 10, 2015 6:32 am
talaangoshtari wrote:$400 is placed in an account earning an annual interest rate of 6%. If the account is compounded annually, how much more interest is earned in the second year than in the first?

A. $1.22
B. $1.33
C. $1.43
D. $1.44
E. $1.54
Initial investment: $400
After 1 year: $400 + (6% of $400) = $400 + $24 = $424
After 2 years: $424 + (6% of $424) = $424 + $25.44 = whatever
We can see that the interest earned in the 2nd year is $1.44 than the interest earned in the 1st year.

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