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Exponentials

Compound Interest

Application 6

You were given $100 for your birthday. You choose to put the money in an interest-bearing account that earns 4.5% interest compounded quarterly. What equation will model the total amount of money in the account?

*Note: When the interest is compounded more than once per year, the formula becomes App6-1 ; App6-2 represents the portion of interest earned for each compounding cycle, App6-3 represents the number of compounding cycles.

Step 1. Determine P. The initial amount is 100.

App6-4

Step 2. Determine nt. The interest rate is 4.5% compounded quarterly. Therefore, the rate must be divided into 4 equal parts.

App6-5

Step 3. Determine nt. The interest is compounded quarterly; therefore n = 4.

App6-6

Step 4. Write the equation.

App6-7