In 2 years, Luther wants to buy a bicycle that costs 500.00. If he opens a savings account that earns 2% interest compounded monthly, how much will he have to deposit as principal to have enough money in 2 years to buy the bike?

Solution

I n 2 ye a rs, Lu t h er w an t s t o b u y a bi cyc l e t ha t cos t s 500.00. I f h e o p e n s a s a v in g s a cco u n t t ha t e a r n s 2% in t eres t co m p o u n d e d m o n t h l y, h o w m u c h w i ll h e ha v e t o d e p os i t a s p r in c i p a l t o ha v e e n o ug h m o n ey in 2 ye a rs t o b u y t h e bik e ?

Principal : 480.41

Solution steps

Translate the problem into an equation:

500 = P (1 + \frac{0.02}{12})^{12 \cdot 2}

Solve for

P, 500 = P (1 + \frac{0.02}{12})^{12 \cdot 2} : P = 480.41

Principal : 480.41