Modeling Investments — Quiz

Question 5 • Advanced Financial Algebra

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

Answer

500 dollars invested in a 3-year bond earning 5 percent interest compounded annually.

A 50 dollars deposit that earns 1 percent simple interest on the principal once annually.

500 dollars deposited into a savings account that earns 2 percent simple interest annually.

Monthly deposits of 50 dollars into a savings account where interest is added to the total balance annually.

Explanation

The formula A = P(1 + r/n)^(nt) models compound interest, where P is the initial amount, r is the annual interest rate, n is the number of times interest is compounded per year, and t is the number of years. In choice A, the $500 bond earns interest compounded annually for 3 years, so n = 1 and t = 3. Choices B and C use simple interest, while D includes repeated deposits rather than a single initial principal.

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