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?

Question 1 options:


Simple Interest


Compound Interest

Answer 1

Answer: Simple interest

Explanation:

Simple interest loan calculation is done on only the principal, that is, Stacey will continuously pay 4.25% interest rate on $5000 borrowed.

Year 1 = 4.25 of 5000

Year 2= 4.25 of 5000 continuously for 5 years

But,

Compound interest will be on principal + accrued interest compounded every year for 5 years, which makes the amount incremental, that is

Year 1 = 4.25% of 5000

Year 2 = 4.25% of 5000(4.25%)

Year 3 = 4.25% of 5000(4.25% + 4.25%)

Hope this helps

Answer 2

Answer: simple interest

Explanation:

For simple interest she will pay

4.25%of $5,000 =$212.5+$5000

=$5212.2 every year for 5 years

For compound interest

She will pay

4.25% of $5,000 =$5212.2 first year

4.25%of $5212.2 second year and so it keeps compounding till 5 years