If Jed deposits $1,500 in a bank at an interest rate of 6.5% compounded monthly, what will be the total amount after five years?

Prepare for the Kaplan Certified Financial Planner (CFP) Test. Study with flashcards and multiple choice questions, each question has hints and explanations. Get ready for your exam!

To determine the total amount after five years for an investment made with compound interest, the formula used is:

A = P(1 + r/n)^(nt)

Where:

• A is the amount of money accumulated after n years, including interest.

• P is the principal amount (the initial amount of money).

• r is the annual interest rate (decimal).

• n is the number of times that interest is compounded per year.

• t is the time in years.

In this scenario, Jed deposits a principal (P) of $1,500 at a rate (r) of 6.5%, compounded monthly (n = 12), and the time period (t) is 5 years.

1. Convert the annual interest rate into a decimal: 6.5% = 0.065.

2. Substitute the values into the formula:

A = 1500(1 + 0.065/12)^(12*5)

A = 1500(1 + 0.00541667)^(60)

A = 1500(1.00541667)^(60)

3. Calculate (1.00541667)^(60):

A ≈ 1500