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
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