Sky78On the GMAT, you will not be asked to compute the value of an expression such as (1.04)^6. In real life, you will be using the calculator. On the GMAT, the final answer choices will just need to be expressed in exponent forms. If they do ask you to compute such an expression, they will likely go up to the square term, for example I have seen problems that required one to compute (1.10)^2.
The examples below illustrate how a compound interest problem would be tested on the GMAT:
Example#1: Testing conceptual understanding
If $1 were invested at 8 percent interest compounded annually, the total value of investement, in dollars at the end of 6 years would be
A) 1.8^6
B)1.08^6
C)6(1.08)
D)1+ 0.08^6
E)1+6(0.08)
Example#2: Conceptual understanding
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
Example#3: Requires computation
Leona bought a 1-year, $10,000 certificate of deposit that paid interest at an annual rate of 8 percent compounded semiannually. What was the total amount of interest paid on this certificate at maturity?
(A) $10,464
(B) $ 864
(C) $ 816
(D) $ 800
(E) $ 480
Cheers,
Dabral