Unformatted text preview: A saver places $1,000 in a certificate of deposit that matures after 20 years and that each year
pays 4% interest, which is compounded annually until the certificate matures.
a) How much interest will the saver earn if the interest is left to accumulate?
$1,000 x 2.191 = $2,191; $1,000 principal + $1,191 in interest
They will accumulate $1,191 in interest
b) How much interest will the saver earn if the interest is withdrawn each year?
They would earn $40; $1,000 x 1.04 per year
20 years x $40 = $800
c) Why are the answers to a and b different? because in part a the interest principal amount
increases yearly , it is like interest deposit. In part b interest principal is always 1000.
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