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Term 3 · Week 1 · Compound Interest

Challenge problem · non-routine

Challenge Non-routine

At 7% per year compounded annually, after how many whole years will a deposit first be at least double its original value?

Show step-by-step solution

Answer: 11 years

  1. We need (1.07)t≥2(1.07)^t \ge 2.
  2. (1.07)10≈1.967(1.07)^{10} \approx 1.967 (not yet double); (1.07)11≈2.105(1.07)^{11} \approx 2.105.
  3. So the deposit first doubles in year 11. The 'Rule of 72' estimate 72÷7≈10.372 \div 7 \approx 10.3 agrees.

Common errors to watch for

  • Using simple interest: 100\%/7\% pprox 14.3 years.

Budget of Work competencies

  • gm11.t3.w1.c1
    Solve problems involving compound interest, including maturity value, future value, nominal rates, and number of terms.

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