All GMAT Math Resources
Grandpa Jack wants to help his grandson, Little Jack, with college expenses. Little Jack is currently 3 years old. If Grandpa Jack invests $5,000 in a college savings account earning 5% compounded yearly, how much money will he have in 15 years when Little Jack is 18?
Possible Answers:
Between $11,000-$11,500
Between $9,000-$9,500
Between $10,000-$10,500
Between $9,500-$10,000
Between $10,500-$11,000
Correct answer:
Between $10,000-$10,500
Explanation:
To solve this, we can create an equation for the value based on time. So if we let t be the nmbers of years that have passed, we can create a function f(t) for the value in the savings account.
We note that f(0) =5000. (We invest 5000 at time 0.) Next year, he will have 5% more than that. To find our total value at the end of the year, we multiply 5,000 * 1.05 = 5,250. f(1) = 5000(1.05)=5,250. At the end of year 2, we will have a 5% growth rate. In other words, f(2) = (1.05)* f(1). We can rewrite this as
Cherry invested dollars in a fund that paid 6% annual interest, compounded monthly. Which of the following represents the value, in dollars, of Cherry’s investment plus interest at the end of 3 years?
Correct answer:
Explanation:
The monthly rate is
3 years = 36 months
According to the compound interest formula
and here ,
, , so we can plug into the formula and get the value
Scott wants to invest $1000 for 1 year. At Bank A, his investment will collect 3% interest compounded daily while at Bank B, his investment will collect 3.50% interest compounded monthly. Which bank offers a better return? How much more will he receive by choosing that bank over the other?
Correct answer:
Explanation:
Calculate the total amount from each bank using the following formula:
Bank A:
Bank B:
Bryan invests $8,000 in both a savings account that pays 3% simple interest annually and a certificate of deposit that pays 8% simple interest anually. After the first year, Bryan has earned a total of $365.00 from these investments. How much did Bryan invest in the certificate of deposit?
Correct answer:
Explanation:
Let be the amount Bryan invested in the certificate of deposit. Then he deposited in a savings account. 8% of the amount in the certificate of deposit is , and 3% of the amount in the savings account is ; add these interest amounts to get $365.00. Therefore, we can set up and solve the equation:
Barry invests $9000 in corporate bonds at 8% annual interest, compounded quarterly. At the end of the year, how much interest has his investment earned?
Correct answer:
Explanation:
Use the compound interest formula
substituting (principal, or amount invested), (decimal equivalent of the 8% interest rate), (four quarters per year), (one year).
Subtract 9,000 from this figure - the interest earned is $741.89
Tom deposits his $10,000 inheritance in a savings account with a 4% annual interest rate, compounded quarterly. He leaves it there untouched for six months, after which he withdraws $5,000. He leaves the remainder untouched for another six months.
How much interest has Tom earned on the inheritance after one year?
Correct answer:
Explanation:
Since in each case the interest is compounded quarterly, the annual interest rate of 4% is divided by 4 to get 1%, the effective quarterly interest rate.
The $10,000 remains in the savings account six months, or two quarters, so 1% is added twice - equivalently, the $10,000 is multiplied by 1.01 twice:
$5,000 is withdrawn from the savings account, leaving
This money is untouched for six months, or two quarters, so again, we multiply by 1.01 twice:
Subtract $5,000 to get the interest:
On January 1, Gary borrows $10,000 to purchase an automobile at 12% annual interest, compounded quarterly beginning on April 1. He agrees to pay $800 per month on the last day of the month, beginning on January 31, over twelve months; his thirteenth payment, on the following January 31, will be the unpaid balance. How much will that thirteenth payment be?
Correct answer:
Explanation:
12% annual interest compounded quarterly is, effectively, 3% interest per quarter.
Over the course of one quarter, Gary pays off , and the remainder of the loan accruses 3% interest. This happens four times, so we will subtract $2,400 and subsequently multiply by 1.03 (adding 3% interest) four times.
First quarter:
Second quarter:
Third quarter:
Fourth quarter:
The thriteenth payment, with which Gary will pay off the loan, will be $913.16.
Jessica deposits $5,000 in a savings account at 6% interest. The interest is compounded monthly. How much will she have in her savings account after 5 years?
Possible Answers:
None of the other answers are correct.
Correct answer:
Explanation:
where is the principal, is the number of times per year interest is compounded, is the time in years, and is the interest rate.
A real estate company is considering whether to accept a loan offer in order to develop property. The principal amount of the loan is $400,000, and the annual interest rate is 7% compounded semi-anually. If the company accepts the loan, what will be the balance after 4 years?
Correct answer:
Explanation:
Recall the formula for compound interest:
, where n is the number of periods per year, r is the annual interest rate, and t is the number of years.
Plug in the values given in the question:
Nick found a once-in-a-lifetime opportunity to buy a rare arcade game being sold at a garage sale for $5730. However, Nick can't afford that right now, and decides to take out a loan for $1000. Nick didn't really read the fine print on the loan, and later figures out that the loan has a 30% annualy compounded interest rate! (A very dangerous rate). How much does Nick owe on the loan 2 years from the time he takes out the loan? (Assume he's lazy and doesn't pay anything back over those 2 years.)
Correct answer:
Explanation:
For compound interest, the amount Nick owes is
where is the principal, or starting amount of the loan ($1000), is the interest rate per year (30% = .3). and is the time that has passed since Nick took out the loan. (2)
We have
Hence our answer is $1690.