Question

If $3000 is deposited in an account that pays 5% interest, what is the difference in the amount after 4 years between the amount earned if the principal is compounded annually and the amount earned calculated using simple interest?

$30.72

$41.12

$46.52

$53.76

Answer 1

If the interest is compounded annually, then
A = P*(1+r/n)^(n*t)
A = 3000*(1+0.05/1)^(1*4)
A = 3646.51875
which rounds to 3646.52
Call this value x, so x = 3646.52
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If the interest is compounded using simple interest, then
A = P*(1+r*t)
A = 3000*(1+0.05*4)
A = 3600
Call this value y, so y = 3600
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Now subtract x and y
x-y = 3646.52-3600 = 46.52
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Therefore the answer is choice C) $46.52