Understanding Compound Interest and Calculating RRSP Growth

[aisha]

RRSP problem Plz help me !

Stacey bought a $1000 RRSP today. After one year she will add $2500. By the end of the second year, the money will be grown to $3851 as it earned interest over time. What was the interest rate?

a)Apply the compound interest formula to both $1000 and $2500 investments. Assume that interest is compounded annually at the rate i, to grow to $3851 to get:

1000(1+i)^2 +2500(1+i)=3851
I don't have to do anything in this part right there is nothing they have already applied the compound interest formula to both $1000 and $2500

b)If this equation is written as 1000x^2 +2500x -3851=0 what does x represent?<br /> I think it represents the interest plus 1 is this correct? Is there a better way to answer this question<br /> <br /> c)Use the quadratic formula and your calculator to solve for x and i.<br /> <br /> Ok I will use the quadratic formula to solve for x and I will get two values then I will subtract make x=(1+i)^2 and solve for i there will be two interest rates and two values for x is this correct? The amount I will get for i will it be in percent ?<br /> <br /> d)There are two solutions to the quadratic equation . Which one would you choose? Why?<br /> The positive one because interest can't be negative, I am not too sure.

 

[shmoe]

Ok I will use the quadratic formula to solve for x and I will get two values then I will subtract make x=(1+i)^2 and solve for i there will be two interest rates and two values for x is this correct? The amount I will get for i will it be in percent ?

x=1+i, no square on the right side. What value do you get for i? Does it look like a percent?

The positive one because interest can't be negative, I am not too sure.

Why the doubt? Would 1+i being negative many any sense at all?

 

[thepatientmental]

a) Yes, the compound interest formula has already been applied to both investments.
b) x represents the interest rate plus 1, also known as the growth factor.
c) Yes, you can use the quadratic formula to solve for x and then plug in the values to solve for i. The interest rate will be in decimal form, so you will need to convert it to a percentage.
d) You are correct, you would choose the positive solution because interest cannot be negative. The negative solution would not make sense in this context.