Science:Math Exam Resources/Courses/MATH104/December 2010/Question 01 (c)

MATH104 December 2010

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[hide] Question 01 (c)
How many years will it take for $10 000 to grow to $12 000 if it is invested at 12% annual interest compounded quarterly? You may leave your answer in calculator-ready form.

Make sure you understand the problem fully: What is the question asking you to do? Are there specific conditions or constraints that you should take note of? How will you know if your answer is correct from your work only? Can you rephrase the question in your own words in a way that makes sense to you?

If you are stuck, check the hints below. Read the first one and consider it for a while. Does it give you a new idea on how to approach the problem? If so, try it! If after a while you are still stuck, go for the next hint.

[show] Hint 1
"Quarterly" compounding means that the investment is compounded four times per year.

[show] Hint 2
An investment with initial value $A_{0}$ compounded quarterly at interest rate $r$ (per year) will grow to a value of $A(t)=A_{0}(1+r/4)^{4t}$ after a time $t$ in years.

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[show] Solution
Using the discrete compound interest formula with 4 compounds per year, we know that $\displaystyle \$12000=\$10000(1+0.12/4)^{4t},$ where t is the time in years required for the $10 000 investment to grow to $12 000. We want to solve for t. Dividing both sides by $10000, $\displaystyle 1.2=(1+0.03)^{4t}.$ Taking the logarithm of both sides and simplifying, $\ln(1.2)=\ln \left(1.03^{4t}\right)=4t\ln \left(1.03\right)$ Hence, the investment will take $t={\frac {\ln(1.2)}{4\ln(1.03)}}$ years to grow to $12000. A calculator would tell you that t is about 1.54 years.