Mathematics·Percentages·grades 9–11

A deposit of 50 000 ₪ at 10% a year with compounding — how much after 2 years?

Problem

50 000 ₪ was put on deposit at 10% a year with annual compounding of the interest. What amount will be in the account after 2 years?

Answer

60 500 ₪

Step-by-step solution

Step 1. What compounding means
Interest accrues on the whole amount, including the interest from the previous year — this is compound interest. The formula: $S = S_0(1+p)^n$ .
Step 2. Substitute
$S_0 = 50000$ , $p = 0.1$ , $n = 2$ : $S = 50000\cdot(1.1)^2$ .

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Step 3. Compute
Step 4. Answer

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Common mistakes

Computing simple interest ( $50000 + 2\cdot5000 = 60000$ ) — with compounding the amount is larger.
Raising the base 0.1 to the power instead of 1.1.

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