ShmoopTube

00:02

Here’s your shmoop du jour, brought to you by compounding interest.

00:07

Sort of like… your level of interest in this video.

00:11

A certain investment pays 8% interest compounded annually.

00:16

If Joaquin invests $500, how much will the investment be worth after 3 years?

00:22

And here are your potential answers...

00:29

We’re so glad we talked Joaquin out of investing his money in that magic bean business he was so hot on.

00:34

So he makes 8% interest on his investment each year…

00:38

…which means that, at the end of each year, he has 108% of the amount he had a year earlier.

00:44

There are two ways we can go from here. We can grind it out and just manually take 108%

00:49

of that initial $500, and then do the same another two times…

00:53

…or we can use our handy-dandy compounding interest formula.

00:57

What is it?

00:58

Amount earned after n years equals the initial amount times 1 plus the

01:04

interest rate to the power of n…years.

01:08

So…plugging in what we know…

01:11

500 times the quantity 1 plus .08 to the third power…right third power

01:17

since that’s how many years have gone by.

01:20

Looks like our answer is C, since we get $629.86.

01:24

Well…WE don’t get $629.86. It would be nice though.

01:27

We could really use a five-year supply of magic beans…

01:42

Full Transcript