Question

A bank made a farmer a loan of​$1200 at 17​% for three years compounded annually. Find the future value and the compound interest paid on the loan. Compare the compound interest with simple interest for the same period.

Answer 1

Answer of Part 1:

Present Value = $1,200

R = 17%

N= 3 years

Future Value = Present Value * (1+r) ^ n
Future Value = $1,200 * (1 + 0.17) ^ 3
Future Value = $1,200 * 1.6016
Future Value = $1,921.92

Compound Interest = Future Value – Present Value
Compound Interest = $1,921.92 - $1,200
Compound Interest = $721.92

Answer of Part 2:

Simple Interest = P * I *N
Simple Interest = $1,200 * 17% * 3
Simple Interest = $612

In Compound Interest Method bank are getting more interest as compared with simple interest method.