SOLUTION: You have $500 in your savings account. Suppose you have a choice of keeping your money for five years in a savings account with a 2% interest rate, or in a five year certificate o

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Question 178354: You have $500 in your savings account. Suppose you have a choice of keeping your money for five years in a savings account with a 2% interest rate, or in a five year certificate of deposit with and interest rate of 4.5%. Calculate how much interest you would earn with each option over five years time with continuous compounding.
Answer by EMStelley(208) About Me  (Show Source):
You can put this solution on YOUR website!
The first thing we need to know for this problem is the formula for continuous compounding. With an initial amount (principal) of P, a rate r, and a time t, the amount is
A=Pe%5E%28rt%29
So for our first situation, P=500, r=0.02, and t=5. So the amount in the account after 5 years would be
A=500e%5E%280.02%2A5%29=552.59
So the amount of interest would be 552.59-500=$52.59.
For the second situation, P=500, r=0.045 and t=5.
A=500e%5E%280.045%2A5%29=626.16
So the amount of interest would be 626.16-500=$126.16.