Problem Solving

M7MBA wrote: ↑

Thu Sep 17, 2020 1:29 am

Lucy deposited $62500 in an investment fund that provided 16 percent annual return compounded quarterly. If she made no other transactions with the fund, in how much time, in months, did her investment earn a total interest of $5100?

A. 0.5
B. 2
C. 3
D. 6
E. 6.1

Answer: D

Solution:

Since the annual interest rate is 16%, the quarterly interest rate is 4%. Therefore, the investment will earn 62,500 x 0.04 = $2,500 for the first quarter (i.e., first 3 months) and (62,500 + 2,500) x 0.04 = 65,000 x 0.4 = $2,600 for the second quarter (i.e, next 3 months). Therefore, in the first 6 months,the investment earns 2,500 + 2,600 = $5,100 in interest.

Answer: D