Question

If $1500 is deposited in an account that pays 4% interest, what is the difference in

the amount after 3 years between the amount earned if the principal is compounded
annually and the amount earned calculated using simple interest?

Answer 1

The Difference between Amount earned from Compound Interest and amount earned from Simple Interest is $7.2

Explanation:

Given as :

The Principal deposited in an account = $ 1500

The annual rate of interest = 4%

The time period = 3 years

From compounded method

Amount = principal ×
`(1+(Rate)/(100))^(Time)`

Or, Amount = $1500 ×
`(1+(4)/(100))^(3)`

Or, Amount = $1500 × ( 1.04 )³

∴ Amount = $1500 × 1.1248

I.e Amount = $1687.2

From Simple Interest method

Simple interest =
`(principal* rate* time)/(100)`

Or, Simple interest =
`(1500* 4* 3)/(100)`

Or, Simple interest =
`(18000)/(100)`

∴ Simple interest = $180

So, Amount = Interest + Principal

Amount = $180 + $1500

I,e Amount = $1680

Difference between Amount earned from CI and amount earned from SI = $1687.2 - $1680 = $7.2

Hence The Difference between Amount earned from Compound Interest and amount earned from Simple Interest is $7.2 Answer