Question

If $10,000 was invested at 4% over ten years, determine the difference if this investment was based on simple interest versus interest that was compounded annually

Answer 1

First let us find the investment value at the end of ten years using simple interest formula:

Where,
A = Amount after 10 years
P = Principal Invested
R = Rate of interest
T = Time

Therefore,

...(not 4% is written in decimal form 0.04)

..............................................(1)

Now let us find value of investment using compound interest formula:

therefore,

......................................(2)

From (1) and (2), the difference = $14,802.44 - $14,000 = $802.44