Final answer:
Whether a simple interest rate of 4.5% is better than a compound interest of 1.5% depends on various factors. The total simple interest from a $5,000 loan at 6% over three years would be $900. If $500 was received from a $10,000 loan over five years, the interest rate would have been 1%.
Step-by-step explanation:
The question of whether a simple interest rate of 4.5% is a better deal than a compound interest rate of 1.5% depends on many factors, including the frequency of compounding for the compound interest and the time period for the investment or loan. In general, because 4.5% is a higher rate than 1.5%, the simple interest would seem better at first glance. However, compound interest can potentially exceed simple interest if the compounding occurs frequently over a long period.
To calculate the total amount of interest from a $5,000 loan after three years with a simple interest rate of 6%, you use the formula I = PRT, where I is the interest, P is the principal amount, R is the rate of interest per year, and T is the time in years:
I = $5,000 x 0.06 x 3 = $900. Thus, the total interest would be $900.
For the second example, if you receive $500 in simple interest from a loan of $10,000 for five years, the interest rate you charged can be calculated using the same formula, rearranged as R = I / (PT):
R = $500 / ($10,000 x 5) = 0.01 or 1%. Therefore, the interest rate charged would be 1%.