If Your Bank Offers a 5% Annual Rate of Return

question 115

Essay

If your bank offers a 5% annual rate of return compounded annually,then at the end of one year your $1,000.00 deposit would grow by $50.00 to $1,050.00.However,in the second year,your deposit would increase by $52.5025 to a total ending value of $1,102.50.Explain why the second year earns more interest on the investment than the first year.

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Definitions:

NCI Entry

A journal entry that records the non-controlling interest's share of equity in the consolidated financial statements.

Equity

The value of an owner’s interest in a company, represented by the difference between the company's assets and liabilities.

Dividends

Payments made by a corporation to its shareholder members from the profits or reserves available for distribution, reflecting a share in the company's earnings.

Profit/(Loss)

The financial result of business operations, calculated as revenues minus expenses. A positive figure indicates profit, while a negative figure indicates loss.