Modeling Investments — Quiz

Question 1 • Advanced Financial Algebra

Which scenario can be modeled using the formula A=P×(1+(r)/(n))^n⁢t ?

Answer

A 2 dollars comma 500 deposit that earns a flat amount of interest each year based on the amount of the initial deposit.

A 1 dollars comma 500 deposited into a savings account where interest is calculated on the original deposit amount once a year for 3 years.

A savings account with an original balance of 2 dollars comma 000, where simple interest is added once annually for 5 years.

A 1 dollars comma 000 investment where the interest earned is calculated on the total balance, including previously earned interest, each quarter for 4 years.

Explanation

The formula A = P(1 + r/n)^(nt) models compound interest, where interest is added to the balance repeatedly and then earns interest itself. In choice D, interest is calculated on the total balance, including previously earned interest, every quarter for 4 years, so n = 4 and t = 4. The other choices describe simple interest, which is calculated only on the original deposit.

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