Question

Recall the equation for simple interest, A = P(1 + rt). Compare the amount of interest earned in 10 years for an investment of $3700 with a 7% annual simple interest rate and a 7% annual interest rate compounded monthly.

simple interest: $______

compound interest: $______

The compound interest investment earned $______more than the simple interest investment.

Answer 1

The amount of interest earned after 10 years in the simple interest investment is $3700 x (1 + 0.07 x 10) = $3700 x 1.7 = $6290.

For the compound interest investment, the formula is A = P(1 + r/n)^(nt), where n is the number of times the interest is compounded in a year (12 in this case).

Using this formula, the amount of interest earned after 10 years is $3700 x (1 + 0.07/12)^(12 x 10) = $3700 x (1.005833333)^120 = $6388.99.

Therefore, the compound interest investment earned $98.99 more than the simple interest investment.