guygmat wrote:

Jerry purchased a 1-year $5,000 bond that paid an annual interest rate of 4% compounded every six months. How much interest had this bond accrued at maturity?

A. $5102

B. $408

C. $216

D. $202

E. $200

EstimateWithout the compound interest formula (I use it, but with short periods and low interest rate, often you can estimate):

Simple interest would yield .04 * 5,000 = $200 in one year

Compound interest at this low rate (halved and paid twice), after only one year, will be barely above that.

Answer D, $202 is barely above $200.

StagesIf unsure about Answer C ($216), run a quick "in stages" calculation.

If interest is paid every 6 months, the 4 percent is split in half (two periods of six months in one year).

After first six months, interest payment is

$5,000 * 02 =

$100 (add $100 to principal for next stage)

After next six months,

.02 * $5,100 =

$102Total interest paid: $202

ANSWER D

_________________

In the depths of winter, I finally learned

that within me there lay an invincible summer.

-- Albert Camus, "Return to Tipasa"