Question

Beatrice invests $1,470 in an account that pays 3 percent simple interest. How much more could she have earned over a 4-year period if the interest had compounded annually?

Answer 1

$8,1 more

Step-by-step explanation:

With a simple interest method Beatrice will receive the same amount in interests each year. It is calculated with this formula:

Interest(I)= Initial capital (IC)* interest rate (i)

Interests:

Year 1: $1,470*0,03= $44,1

Year 2: $1,470*0,03= $44,1

Year 3: $1,470*0,03= $44,1

Year 4: $1,470*0,03= $44,1

Total interests earned: $176,4

With a compound interest method Beatrice receive more interests. We use this formula:

Interest (I)= Previous period capital* Interest rate (i)

Year 1: $1,470*0,03= $44,1 New capital: $1,470+$44,1= $1,514.1

Year 2: $1,514.1*0,03= $45,4 New capital: $1,514.1+$45,4 =$1,559.5

Year 3: $1,559.5*0,03= $46,8 New capital: $1,559.5+$46,8 =$1,606.3

Year 4: $1,606.3*0,03= $48,2 New capital: $1,606.3+$48,2 =$1,654.5

Total interests earned: $184.5

She could save $8.1 more with the compounded method.