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Cash of $1,000 kept at home is still $1,000.00 after ten years, while the same $1,000 in an account paying 2 percent compounded monthly reaches $1,221.10. How much did the interest add?
A$105.08
B$221.10
C$121.10
D$1,221.10
Answer & Solution
Correct answer: B. $221.10
1. Cash held outside an account earns nothing, so it stays at $1,000.00 after ten years.
2. The deposit account balance after ten years is $1,221.10.
3. The interest added is the gap between the two balances.
4. $1,221.10 minus $1,000.00 gives $221.10.
5. $105.08 is the gain over five years rather than ten, so it answers the wrong horizon.
6. $121.10 drops the leading hundred dollars from the correct gap.
7. $1,221.10 is the whole ending balance, which counts the original $1,000.00 twice.
_Source: FDIC Money Smart for Adults (September 2018), Module 5: Your Savings, section Interest and Compounding_
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