Question

Two savings accounts were each opened with a $6,000 deposit. Account A earns compound interest at a 2% annual interest rate compounded yearly. Account B earns simple interest at a 2% annual interest rate. No other deposits or withdrawals are made from the accounts for 3 years.

What is the difference in interest earnings between the two accounts after 3 years?

Account A will earn approximately $360 less in interest than account B.
Account A will earn approximately $7 less in interest than account B.
Account A will earn approximately $360 more in interest than account B.
Account A will earn approximately $7 more in interest than account B.
Both accounts will earn the same amount of interest.

Answer 1

Account A will earn approximately $7 more in interest than account B.

Explanation:

Answer 2

Account A will earn approximately $7 more in interest than account B

Explanation:

Compound interest formula:

A = P*(1 + r/n)^(n*t)

where:

A is the amount

P is the principal = $6,000

r is the rate (as a decimal) = 0.02

t is time in years = 3

n is the the number of times interest is compounded per unit t = 1

Then:

A = 6000*(1 + 0.02/1)^(1*3) = $6367

Simple interest formula:

A = P*(1 + r*t)

Replacing with data:

A = P*(1 + 0.02*3) = $6360