Answer: Option B ($1200 at 8% compound interest per annum for 2 years) is a better investment.
Explanation:
In option A, the interest is calculated on the principal amount only, which is known as simple interest.
Simple Interest Formula:
Simple Interest = (P × R × T) / 100
Where P is the principal amount, R is the rate of interest and T is the time period.
So, for option A:
P = $1200
R = 9%
T = 2 years
Simple Interest = (1200 × 9 × 2) / 100 = $216
Total Amount = Principal + Simple Interest = $1200 + $216 = $1416
In option B, the interest is calculated on the principal amount as well as the interest earned in previous years, which is known as compound interest.
Compound Interest Formula:
Total Amount = P (1 + R/100) ^n
Where P is the principal amount, R is the rate of interest and n is the number of years.
So, for option B:
P = $1200
R = 8%
n = 2 years
Total Amount = 1200 (1 + 8/100) ^2 = $1369.86
As we can see, option B yields a higher total amount compared to option A, so it is a better investment choice.