Question

Beatrice invests $1,350 in an account that pays 4 percent simple interest. How much more could she have earned over a 5-year period if the interest had been compounded annually?

Answer 1

Amount earned over a 5-year period if the Interest is simple compound

A = P (1+rt)

Where P =initial principal balance i.e. $1350

A =final amount

r =rate of interest i.e 4%

T = time period i.e. 5 years

A = $1,350 [1+ (.04X 5)]

A = $1,350 [1.20]

A = $1620

Amount earned over a 5-year period if the Interest is compounded annually

A = P (1+ r/n )nt

Where P =initial principal balance i.e. $1350

A =final amount

r =rate of interest i.e. 4%

n= no of times interest applied for annually it is 1

T = time period i.e. 5 years

A = 1350 (1+ 0.04)5

A = $1642.48

Extra amount earned over a 5-year period if the interest had been compounded annually will be

$1642.48 - $1620 = $ 22.48 (rounded off to two decimal places)

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