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16 January, 18:53

If $1500 is deposited in an account that pays 4% interest, what is the difference in the amount after 3 years between the amount earned if the principal is compounded annually and the amount earned calculated using simple interest? A.$3.20 B.$7.30 C.$9.40 D.$15.10

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  1. 16 January, 22:00
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    Using an example of depositing 1300$ at 8% for 5 years, we have the compound interest formula to be

    T=P (1+r/n) ^ (nt), with T being the total, P being the principle (or starting number), r being the interest rate (percentage to decimal), n being the number of times it's compounded per year, and t being the time in years, we have

    T=1300 (1+0.08/1) ^ (3*1) due to since it's compounded annually, it's compounded once per year (annually means once a year, or every year according to Google). Putting that into a calculator, we get T=1637.6256

    For the simple interest formula, we have I=Prt, with P being the principal, r being the rate, and t being the time in years. Plugging the numbers we had for the compound interest formula in, we get

    I=1300*0.08*3=312 as the interest. Adding 1300 to that (since we need the interest plus what we started with), we get 1612.

    We have 1612 and 1637.6256, so the difference is

    1637.6256-1612=25.6256.

    You can apply this method to your own problem - good luck, and feel free to ask any questions that come up!
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