Category: Business and Money > Finance
Asked by: guzmanr9-ga
List Price: $10.00
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?
Re: Compounded Interest
Answered By: answerguru-ga on 14 Feb 2006 12:04 PST
Hi guzmanr9-ga, Compounded interest follows a relatively straightforward formula: P(1+r)^t Where: 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: P(1+r)^t 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: P(1+r)^t 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 :) Cheers, answerguru-ga
rated this answer:
Thank you, very detailed, easily understood
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