Question

A bank made a farmer loan of $1,000 at 14% for 3 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: Future Value = $

Compound Interest = $

Simple Interest = $

Compound Interest is = $ more than simple interest.

Answer 1

Principal = $1,000

Rate of interest = 14% = 0.14

Time = 3 years

`A= P(1+r)^t`

A = Amount or future value

P = Principal

r = rate of interest in decimals

t = time

Substitute the values in the formula

`A= 1000(1+0.14)^3`

`A=1481.544`

Future Value is $1481.544

Compound interest = Amount - Principal = $1481.544- $1000 = $481.544

Formula of simple interest :
`SI =(P * R * T)/(100)`

Substitute the values :

`SI =(1000 * 14 * 3)/(100)`

`SI =420`

So, Simple interest = $420

Compound interest - Simple interest

= $481.544- $420

= $61.544

So, Compound Interest is $61.544 more than simple interest.