Science:Math Exam Resources/Courses/MATH104/December 2015/Question 02 (a)

MATH104 December 2015

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Question 02 (a)
If $4000 dollars is invested in a bank account at an interest rate of 6% per year, compounded continuously, how long will it take in years for the balance to reach $20000 dollars?

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.

Hint 1
Recall that the (non-continuous) compound interest formula is $A(t)=P\left(1+{\frac {r}{n}}\right)^{nt},$ where $A(t)$ is the amount as a function of time (in years) $P$ is the principal $r$ is the annual interest rate $n$ is the number of compounding periods per year Continuous compounding is the result of taking the limit as $n\to \infty .$

Hint 2
Make the substitution $n=rx$ in the formula of hint 1 and recall that $e:=\lim _{x\to \infty }\left(1+{\frac {1}{x}}\right)^{x}.$

Hint 3
For continuous compounding, we have $A(t)=\lim _{n\to \infty }P\left(1+{\frac {r}{n}}\right)^{nt}=\lim _{x\to \infty }P\left(1+{\frac {1}{x}}\right)^{rxt}$ after making the substitution suggested in hint 2. We recognize the limit as $A(t)=\lim _{x\to \infty }P\left[\left(1+{\frac {1}{x}}\right)^{x}\right]^{rt}={\color {BrickRed}Pe^{rt}}.$

Checking a solution serves two purposes: helping you if, after having used all the hints, you still are stuck on the problem; or if you have solved the problem and would like to check your work. If you are stuck on a problem: Read the solution slowly and as soon as you feel you could finish the problem on your own, hide it and work on the problem. Come back later to the solution if you are stuck or if you want to check your work. If you want to check your work: Don't only focus on the answer, problems are mostly marked for the work you do, make sure you understand all the steps that were required to complete the problem and see if you made mistakes or forgot some aspects. Your goal is to check that your mental process was correct, not only the result.

Solution

Found a typo? Is this solution unclear? Let us know here. Please rate my easiness! It's quick and helps everyone guide their studies. The solution is a straightforward application of the continuous compound interest formula $A(t)=Pe^{rt}$ (these variables are defined in hint 1). We are given $P=4000$ and $r=6\%=0.06,$ and we seek the $t$ for which $A(t)=20000.$ ${\begin{aligned}A(t)&=Pe^{rt}\\20000&=4000e^{0.06t}\\5&=e^{0.06t}\\\ln 5&=\ln e^{0.06t}\\\ln 5&=0.06t\\t&={\color {blue}{\frac {\ln 5}{0.06}}{\text{ years}}}\,.\end{aligned}}$