Question

If you have a choice to earn simple interest on $10,000 for three years at 8% or annually compounded interest at 7.5% for three years which one will pay more and by how much

Answer 1

The compound interest will yield $22.97 more than simple interest.

Step-by-step explanation:

Giving the following information:

Initial investment (PV)= $10,000

Interest rate (r)= 8% simple interest

Interest rate (i)= 7.5% compound interest

Number of periods= 3 years

To calculate the future value of both options, we need to use the following formulas:

Simple interest:

FV= PV*r*t + PV

FV= 10,000*0.08*3 + 10,000

FV= $12,400

Compound interest:

FV= PV*(1 + i)^t

FV= 10,000*(1.075^3)

FV= $12,422.97

The compound interest will yield $22.97 more than simple interest.