Question

If Tom deposit $10,000 to Bank A with simple interest rate of 2% per quarter for 5 years. How much will he get at the end of year 5? If Matt deposit $10,000 to Bank B with compound interest rate of 2% per quarter for 5 years. How much will he get at the end of year 5? Please explain the difference between the amount that Tom and Matt get?

Answer 1

simple Interest = P*N*R
P= principal
N= number of periods
R = interest rate per period
=$10000*(5*4) *2%
=$4000
He will get at the end of year 5 = $10000+4000
=$14000
Compounding Interest
FV= PV*(1+r)^n
Where,
FV= Future Value
PV = Present Value
r = Interest rate
n= periods in number
= $10000*( 1+0.02)^20
=10000*1.48595
= $14859.47
Difference = $14859.47-14000
=$859.47
Difference is due to interest-on interest component .