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Q: Compounded Interest ( Answered 5 out of 5 stars,   0 Comments )
Subject: Compounded Interest
Category: Business and Money > Finance
Asked by: guzmanr9-ga
List Price: $10.00
Posted: 14 Feb 2006 11:45 PST
Expires: 16 Mar 2006 11:45 PST
Question ID: 445741
In 1880 five aboriginal trackers were each promised the equivalent of
100 Australian dollars for helping to capture the notorious outlaw Ned
Kelley. In 1993 the granddaughters of two of the trackers claimed that
this reward had not been paid. The Victorian prime minister stated
that if this was true, the government would be happy to pay the $100.
However, the granddaughters also claimed that they were entitled to
compound interest. How much was each
entitled to if the interest rate was 4 percent? What if it was 8 percent?
Subject: Re: Compounded Interest
Answered By: answerguru-ga on 14 Feb 2006 12:04 PST
Rated:5 out of 5 stars
Hi guzmanr9-ga,

Compounded interest follows a relatively straightforward formula:


P = Principal amount
r = rate of return
t = time elapsed

In this case, we know all of this information:

P = $100
r = 4% = 0.04
t = 1993 - 1880 = 113 years

So we can calculate using the formula above:


100(1 + 0.04)^113
= 100(1.04)^113
= 100(84.0945)
= 8409.45

Therefore, at a rate of 4%, the granddaughters claim they are owed $8409.45.

If the rate is 8%, we repeat the same steps as follows:


100(1 + 0.08)^113
= 100(1.08)^113
= 100(5982.52)
= 598252.29

Therefore, at a rate of 8%, the granddaughters claim they are owed $598,252.29

This difference in rates is actually meant to show how when interest
is compounded, it's rate of growth is exponential. In this example,
you can see that the growth rate at 8% is far more than double the
growth rate at 4%.

I hope this helps you understand the concept of compounded interest :)

guzmanr9-ga rated this answer:5 out of 5 stars
Thank you, very detailed, easily understood

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