Problem Solving

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

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