If $1000 was invested at an annual interest rate of 5.6%

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VJesus12: Legendary Member; Posts: 2276; Joined: Sat Oct 14, 2017 6:10 amFollowed by: 3 members

by VJesus12 » Sun Dec 08, 2019 7:45 am

If $1000 was invested at an annual interest rate of 5.6% compounded annually, which of the following represents the amount the investment was worth after 3 years?

A. $1000(1.056)(3)$

B. $1000(3+1.056)$

C. $1000(1+3(0.056))$

D. $1000(1+(0.056)3)1000(1+(0.056)3)$

E. $1000(1.056)^3$

[spoiler]OA=E[/spoiler]

Source: GMAT Prep

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Source: Beat The GMAT — Problem Solving | Sun Dec 08, 2019 7:45 am

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[email protected]: Elite Legendary Member; Posts: 10392; Joined: Sun Jun 23, 2013 6:38 pmFollowed by: 511 members; Location: Palo Alto, CA; Thanked: 2867 times; GMAT Score:800

by [email protected] » Sun Dec 08, 2019 1:14 pm

Hi VJesus12,

We're told that $1000 was invested at an annual interest rate of 5.6% COMPOUNDED ANNUALLY. We're asked which of the following represents the amount that the investment was worth after 3 years.

The Compound Interest Formula is one of two interest rate formulas that you need to know for Test Day. It is:

Principal x (1 + R)^T where R is the annual interest rate and T is the number of years (note: if interest is compounded MORE than once per year, you divide R by the number of calculations and multiply T by that same number of calculations).

Here, we're given all of the numbers to 'plug in', which gives us:

$1000(1 + 0.56)^3

Final Answer: [spoiler=]E[/spoiler]

GMAT assassins aren't born, they're made,
Rich

Contact Rich at [email protected]

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Scott@TargetTestPrep: GMAT Instructor; Posts: 8155; Joined: Sat Apr 25, 2015 10:56 amFollowed by: 29 members; Location: Los Angeles, CA; Thanked: 43 times

by Scott@TargetTestPrep » Tue Dec 10, 2019 7:17 pm

VJesus12 wrote:If $1000 was invested at an annual interest rate of 5.6% compounded annually, which of the following represents the amount the investment was worth after 3 years?

A. $1000(1.056)(3)$

B. $1000(3+1.056)$

C. $1000(1+3(0.056))$

D. $1000(1+(0.056)3)1000(1+(0.056)3)$

E. $1000(1.056)^3$

[spoiler]OA=E[/spoiler]

Source: GMAT Prep

For interest compounded annually, we use the formula FV = P(1 + r)^t, where P = the original investment, r = the interest rate, expressed as a decimal, and t = the number of years. After 3 years, the investment was worth:

FV = 1000(1 + 0.056)^3

FV = 1000(1.056)^3

Answer: E

Scott Woodbury-Stewart
Founder and CEO
[email protected]

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