Question

Which would double your money sooner, a compound interest rate of 5% or a simple interest of 6%, and why?

Answer 1

Simple interest will double the amount soon as the interest rate is higher than the compounding interest.

Step-by-step explanation:

In a simple term of 5 years

Investing $500

In simple interest @ 6% value at end of 5 years = $500
`*` 6% = $30

For 5 years = $30
`*` 5 = $150

Value = $500 + $150 = $650

In compounding interest, we have

Future value factor for 5 years @ 5% = 1.276

Value at end of 5 years = $500
`*` 1.276 = 638.14

The value is higher in case of simple interest thus, simple interest will double the money soon.