If you invest $1,000 at 5% annual compound interest for 2 years, what is the amount?

If you invest $1,000 at 5% annual compound interest for 2 years, what is the amount?

• A. 1000.00
• B. 1102.50
• C. 1050.00
• D. 1200.00

Answer: (B)

This question tests how compound interest grows a balance over multiple years. With annual compounding, each year the balance is multiplied by 1.05. Start with 1000: after the first year it becomes 1000 × 1.05 = 1050. After the second year, it becomes 1050 × 1.05 = 1102.50. So the amount after 2 years is 1102.50. Equivalently, A = P(1 + r)^t gives 1000(1.05)^2 = 1102.50.

This question tests how compound interest grows a balance over multiple years. With annual compounding, each year the balance is multiplied by 1.05. Start with 1000: after the first year it becomes 1000 × 1.05 = 1050. After the second year, it becomes 1050 × 1.05 = 1102.50. So the amount after 2 years is 1102.50. Equivalently, A = P(1 + r)^t gives 1000(1.05)^2 = 1102.50.