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7 August, 22:47

Two savings accounts each start with a $200 principal and have interest rate of 5%. One account earns simple interest and the other is compound annually. Which account will earn more interest over 10 years? How much more?

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  1. 7 August, 23:55
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    Formula for Simple Interest: I = PRT

    P = Principal

    R = Interest rate per time period in decimal

    T = number of time periods

    Now you just substitute: 200 x 0.05x 10 = $100 interest

    Formula for Compound Interest: A = P (1 + r) ^n

    A = Final amount to which investment grows

    P = Principal

    r = interest rate per period as decimal

    n = number of corresponding periods

    Substitute: 200 (1 + 0.05) ^10 = $325.80 (rounded)

    Now compare and the compound interest earns more by $225.80
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