Multiple choice

Ms. Melissa opened a savings account in Wells Fargo Bank and deposited a certain amount of money. The amounts of interest earned by her in the 3rd and 4th years were $900 and $1,000, respectively, compounded annually. Calculate the rate of interest.

  1. 9%

  2. 9.27%

  3. 10.50%

  4. 11.11%

  5. 12.50%
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Let P be the principal and r be the rate. Interest in year 3 is P(1+r)^2 * r = 900. Interest in year 4 is P(1+r)^3 * r = 1000. Dividing the two equations: (1+r) = 1000/900 = 10/9. Thus, r = 1/9 = 11.11%.

AI explanation

In compound interest, the interest earned in consecutive years forms a geometric progression, meaning the percentage increase between the interest of the 3rd and 4th years directly gives the rate of interest. The difference between the interests is $1000 - $900 = $100. Applying the formula for percentage increase, Rate = ((Difference) / (Initial Interest)) * 100 = (100 / 900) * 100, which equals 11.11%. The rate of interest is 11.11%.

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