Question

Stacy is borrowing $5,000 at 4.25% interest for 5 years. She can choose simple interest or compound interest. Which one will allow her to owe the LEAST amount of money in interest over those 5 years?

Answer 1

Simple Interest

Explanation:

Compound interest:

`a = p {(1 + (r)/(100) )}^(n)`

a = total amount

p = principal

r = rate of interest

n = no. of years

a = 5000(1.0425)⁵

= 5000(1.231)

= $6155

Simple interest:

`I = (prt)/(100)`

I = amount of interest

t = time

I = (5000×4.25×5)÷100

= 106250 ÷ 100

= $1062.50

total = $5000 + $1062.50

= $6062.50

(Correct me if i am wrong)

Answer 2

Simple interest will allow her to owe the least amount of money.

Explanation:

Compound interest = $1156.73

Simple interest (I) = P * r * t

$1062.50