Question

Which interest rate will earn the largest return on $1,000?

A. Simple interest at 5 percent

B. Simple interest at 3 percent

C. Compound interest at 3 percent

D. Compound interest at 5 percent

Answer 1

Compound interest at 5 percent will earn the largest return on $1,000.

Step-by-step explanation:

In order to determine which interest rate will earn the largest return on $1,000, we need to compare the simple interest and compound interest options. Simple interest is calculated as a percentage of the principal amount, while compound interest includes the accumulated interest in subsequent periods. Let's compare the options:

1. Simple interest at 5 percent: The total future amount after three years would be $1,000 + ($1,000 x 0.05 x 3) = $1,150.
2. Simple interest at 3 percent: The total future amount after three years would be $1,000 + ($1,000 x 0.03 x 3) = $1,090.
3. Compound interest at 3 percent: The total future amount after three years would be $1,000 x (1 + 0.03)^3 = $1,092.73.
4. Compound interest at 5 percent: The total future amount after three years would be $1,000 x (1 + 0.05)^3 = $1,157.63.

Therefore, the interest rate that will earn the largest return on $1,000 is compound interest at 5 percent.