Question

You open a 5-year CD for $1000 that pays 2% interest, compounded annually. What is the value of that CD at the end of the five years?

Short answer

The value of CD at the end of five years is obtained as $5520.40

Step-by-step solution

Concept introduction

The addition of interest towards the principal amount of a debt or deposit is known as compound interest. It is the result of reinvesting money interest instead of giving it out, such that interest just on payment of principal previously earned interest is returned in the following quarter.

Calculation

The compound interest formula is followed as:

A=P$(1+r{)}^t$

Where, A= Total Accrued Amount

P=Principal Amount

r=Rate of interest, and

t=Time period.

Putting the values in formula,

A=$(1+0.02{)}^5$

Solving the above, we get the value of a CD at the end of 5 year is $5,520.40