Question

George wants to invest $3,250. American Bank offers a simple interest rate of 4%, while Liberty Savings offers an interest rate of 3.75% compounded annually. How much more in interest will George earn after 8 years if he invests with Liberty Savings rather than American Bank?

Answer 1

We can see that the simple interest is better

Explanation:

We calculate the simple interest and the compound interest values

Simple interest

I = PRT/100

I is principal

R is the rate

T is the time

I = (8000 * 4 * 8)/100 = 3,840

For the compound interest, we have that;

A = I( 1 + r)^n

A is the amount in the account after the saving period

I is the amount deposited

r is the rate

n is the number of years

Substituting these, we have that;

A = 3250(1 + 0.04)^8

A = 4447.85

The interest is this amount minus the deposit

That will be;

4447.85 -3250 = 1,197.5