What is the future value of 1,000 after 2 years with an annual compound interest rate of 5%?

What is the future value of 1,000 after 2 years with an annual compound interest rate of 5%?

• A. 1050
• B. 1100
• C. 1102.50
• D. 1125

Answer: (C)

This question tests how compound interest grows a sum over time when the interest is added each year. With annual compounding, the future value after two years is the present value times (1 plus the rate) squared. So you have 1000 × (1.05)^2. Compute (1.05)^2 = 1.1025, then multiply by 1000 to get 1102.50. That’s why the future value is 1102.50. The other options reflect either simple interest over two years or an incorrect compounding assumption, but do not use the effect of compounding 5% annually for two years.

This question tests how compound interest grows a sum over time when the interest is added each year. With annual compounding, the future value after two years is the present value times (1 plus the rate) squared. So you have 1000 × (1.05)^2. Compute (1.05)^2 = 1.1025, then multiply by 1000 to get 1102.50. That’s why the future value is 1102.50. The other options reflect either simple interest over two years or an incorrect compounding assumption, but do not use the effect of compounding 5% annually for two years.