A 2-year certificate of deposit is purchased for K dollars. If the : Problem Solving (PS)

remgeo

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30 Nov 2005, 13:13

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I am getting answer as A.
But there is definitely an easier method than what I have done :oops:

desiguy

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30 Nov 2005, 13:23

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I also got B

since it pays quarterly we take 4*2 (no of years) = 8

christoph

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30 Nov 2005, 13:39

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D)...compund interest is: initial amount*(1+interest/x)^(time*x), where x is the number of times compunded annually

joemama142000

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30 Nov 2005, 15:42

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should we all memorize this compound interest fomula? or is it not necessary?

duttsit

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30 Nov 2005, 15:56

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joemama142000

should we all memorize this compound interest fomula? or is it not necessary?

I would memorise it. A variation of it is used various contexts(eg money growing by 10% every year, mixture pbs etc)

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30 Nov 2005, 19:10

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joemama142000

should we all memorize this compound interest fomula? or is it not necessary?

It is necessary.

I've taken the test yesterday, and one of the math questions required calculation of compound interest. Obviously, the formular was not given.

GMATT73

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01 Dec 2005, 22:26

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Got D as well. Just remember that with compound interest the # of compoundings must be multiplied to the # of years---> 4*2=8.

Between B and D, B fails to divide the interest rate (6%) by the compound (4). Therefore, it cannot be 1.06.

(D) by POE

krisrini

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02 Dec 2005, 04:19

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I think its good to know the formula for CI. The formula is
A=P(1+r/100)^n, Where P is the priniciple, R is the rate of interest, and n is the number of years.
In our case P =K, r = 6 and n = 8 (Since the interest is compounded quareterly, and for 2 years there are 8 quarters).

So it is K(1+6/100)^8
K(1.06)^8

GMATT73

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02 Dec 2005, 07:03

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krisrini

I think its good to know the formula for CI. The formula is
A=P(1+r/100)^n, Where P is the priniciple, R is the rate of interest, and n is the number of years.
In our case P =K, r = 6 and n = 8 (Since the interest is compounded quareterly, and for 2 years there are 8 quarters).

So it is K(1+6/100)^8
K(1.06)^8

I think your formula is missing a few factors. We also must divide the interest rate by the # of compoundings per year (n) and multiply n by the number of years (y):

FV (future value)
P (principle)
r (interest rate expressed in decimal form)
n (number of compoundings)
t (time, in years)

FV=P(1+r/n)^t*n

remgeo

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02 Dec 2005, 07:22

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christoph

D)...compund interest is: initial amount*(1+interest/x)^(time*x), where x is the number of times compunded annually

If this is the formula for Compund Interest, we get interest as
k(1.015)^8
But we are asked the amount after two years isnt it.
Please can someone correct me where I am wrong.

HIMALAYA

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02 Dec 2005, 08:31

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remgeo

christoph

D)...compund interest is: initial amount*(1+interest/x)^(time*x), where x is the number of times compunded annually

If this is the formula for Compund Interest, we get interest as
k(1.015)^8
But we are asked the amount after two years isnt it.
Please can someone correct me where I am wrong.

k is the initial amount. so end amount at the end of 2 years = k (1.015)^8

bmwhype2

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27 May 2007, 16:16

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GMATT73

We also must divide the interest rate by the # of compoundings per year (n) and multiply n by the number of years (y):

FV (future value)
P (principle)
r (interest rate expressed in decimal form)
n (number of compoundings)
t (time, in years)

FV=P(1+r/n)^t*n

yes this is the correct answer. its a very simple question.

FV=P(1+r/n)^t*n
k [1+ (6/4)] ^ (4*2)

k [1+ (.015)] ^8
therefore D

tarangchhabra

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18 Jan 2015, 07:01

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joemama142000

A 2-year certificate of deposit is purchased for K dollars. If the certificate earns interest at a n annual rate of 6 percent compound quarterly, which of the following represents the value, in dollars, of the certificate at the end of 2 years?

A. k(1.06)^2
B. k(1.06)^8
C. k(1.015)^2
D. k(1.015)^8
E. k(1.03)^4

Annual Rate of interest= 6%
Quaterly rate of interest= 6/4% = 1.5%

Now, periods of compounding in 2 years= 8 (8 quarters)
Thus k(1.015)^8

Answer: D

JMGrana

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05 Oct 2017, 06:34

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I picked up initially on the fact that there are 2 years (or 8 quarters), but fell for the ANNUAL RATE of 1.06 because i forgot to divide that .06 interest rate by 4 quarters. Subtle.

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28 Jun 2019, 06:12

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Bunuel,
This question needs an edit
The question reads
A 2-year certificate of deposit is purchased for K dollars. If the certificate earns interest at a n annualrate of 6 percent compound quarterly, which of the following represents the value, in dollars, of the certificate at the end of 2 years?

While i guess it should be :
A 2-year certificate of deposit is purchased for K dollars. If the certificate earns interest at an annual rate of 6 percent compound quarterly, which of the following represents the value, in dollars, of the certificate at the end of 2 years?

Bunuel

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28 Jun 2019, 10:54

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Probus

Bunuel,
This question needs an edit
The question reads
A 2-year certificate of deposit is purchased for K dollars. If the certificate earns interest at a n annualrate of 6 percent compound quarterly, which of the following represents the value, in dollars, of the certificate at the end of 2 years?

While i guess it should be :
A 2-year certificate of deposit is purchased for K dollars. If the certificate earns interest at an annual rate of 6 percent compound quarterly, which of the following represents the value, in dollars, of the certificate at the end of 2 years?

______________________
Edited. Thank you.

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Hello from the GMAT Club BumpBot!

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