Question

Beatrice is investing $5,000 in an account that pays 4 percent simple interest. How much more could she have earned over a period of 10 years if the interest had compounded annually?

Multiple Choice

• $414.79

• $0

• $385.65

• $401.22

• 390.70

Answer 1

Ans. $401.22

• A = the future value of the investment/loan, including interest
• P = the principal investment amount (the initial deposit or loan amount)
• r = the annual interest rate (decimal)
• n = the number of times that interest is compounded per unit t
• t = the time the money is invested or borrowed for

Simple interest :

A = P(1 + rt)

5000 ( 1 + 0.04 × 10)

= 7000

compound interest :

A = P (1 + r/n) ^(nt)

=5000 ( 1 + 0.04 / 1)^(1 × 10)

7401.22

now,

CI - SI

7401.22 - 7000

= 401.22