Question

Rosie has $13,000, She earns 5 percent interest, compounded annually. Andy also has $13,000 and earns 5 percent interest, compounded annually. Rosie will withdraw her interest earnings and spend it as soon as possible. Andy will reinvest his interest earnings into his account. Which one of the following statements is true?

Rosie will earn compound interest.
Andy will earn more interest the first year than Rosie will.
Andy will earn more interest the second year than Rosie.
After five years, Andy and Rosie will both have earned the same amount of interest.
Rosie will earn more interest in year three than Andy will.

Answer 1

Answer: Option C

Step-by-step explanation: In simple words, compound interest refers to the interest that includes previously earned and deposited interest in calculating present interest amount along with the principal value.

In the given case, Rosie and Andy both deposited the same amount of principal with same interest rate. Thus, both will earn the same interest in initial year. However, Rosie withdrawal will not give her interest that she could have earned on the first interest amount.

Hence, from the above we can conclude that the correct option is C .