What is the future value of 1,000 invested for 5 years at 6% annual return, compounded annually?

What is the future value of 1,000 invested for 5 years at 6% annual return, compounded annually?

• A. 1250.00
• B. 1338.23
• C. 1400.00
• D. 1500.00

Answer: (B)

Future value with annual compounding grows by multiplying the present value by (1 + i) raised to the number of periods. Here, the rate i is 6% (0.06) and the time n is 5 years, with a present value of 1,000. So the future value is 1,000 × (1.06)^5. Calculating (1.06)^5 gives about 1.3382256, and multiplying by 1,000 yields approximately 1,338.23. This reflects interest earned each year on the accumulated amount, not just on the original principal. If the interest were simple, you’d have 1,300, which is lower, so the compounding effect is what pushes the value to about 1,338.23.

Future value with annual compounding grows by multiplying the present value by (1 + i) raised to the number of periods. Here, the rate i is 6% (0.06) and the time n is 5 years, with a present value of 1,000. So the future value is 1,000 × (1.06)^5. Calculating (1.06)^5 gives about 1.3382256, and multiplying by 1,000 yields approximately 1,338.23. This reflects interest earned each year on the accumulated amount, not just on the original principal. If the interest were simple, you’d have 1,300, which is lower, so the compounding effect is what pushes the value to about 1,338.23.