About Compound Interest Word Problems:

In this lesson, we will learn how to solve a compound interest formula word problem. The compound interest formula is given as: A = P(1 + r/n)(tn), where A is the future value, P is the present value or principal amount, r is the rate as a decimal, n is the number of compounding periods in a year, and t is the number of years.


Test Objectives
  • Demonstrate an understanding of how to solve a word problem
  • Demonstrate the ability to solve a compound interest word problem
Compound Interest Word Problems Practice Test:

#1:

Instructions: solve each word problem.

a) Larry invested $27,000 in a savings account that pays an annual interest rate of 1.8%. The savings account is set to compound quarterly (4 times per year). How much is in Larry’s account after 5 years?


#2:

Instructions: solve each word problem.

a) Becky invested 19,800 in a CD that pays an annual interest rate of 5.3%. The CD is set to compound daily (365 times per year). How much is in Becky’s account after 9 years? Note: Ignore the extra day from leap years


#3:

Instructions: solve each word problem.

a) Jake invests in an annuity with an annual fixed interest rate of 6.2%. The annuity compounds monthly (12 times per year). If after 10 years, the account balance is $27,839.45 how much was the beginning investment?


#4:

Instructions: solve each word problem.

a) Jennifer is saving up for a house and wants a 20% down payment. She will invest a lump sum into a savings account for 5 years that pays 4.3% annual interest and compounds monthly (12 times per year). After some calculations, she figures her ideal house will cost $140,000. How much should she put in the savings account?


#5:

Instructions: solve each word problem.

a) Mellissa visits two competing banks. National Bank and Trust is offering a 5 year CD with an annual interest rate of 3.75%. This account will compound monthly (12 times per year). Jones Town Bank is offering a 5 year CD with an annual interest rate of 3%. This account will also compound monthly (12 times per year). The Jones Town Savings and Loan is offering a $300 bonus to all new customers. This bonus money will be deposited in Melissa’s account on the first day of her account being opened. Assuming Melissa has $10,000 to invest, which bank should she choose? If her investment amount changed to $5000, how would this affect her decision?


Written Solutions:

#1:

Solutions:

a) $29,536.74


#2:

Solutions:

a) $31,901.32


#3:

Solutions:

a) $15,000


#4:

Solutions:

a) $22,591.84


#5:

Solutions:

a) Investment of $10,000 - National Bank and Trust, Investment of $5000 - Jones Town Bank