Question

If you invested $500 at 5% simple interest for 2 years, how much interest do you earn? Show work and answer in complete sentences to earn full credit.

If you invest $500 at 3% compounded monthly for 2 years, how much interest you do earn? Show work and answer in complete sentences to earn full credit.




Which would you rather do?

Answer 1

i) $500 at 5% simple interest for two years.

Interest = 550 - 500 = $50

ii) $500 at 3% compounded monthly for 2 years.

Interest = 530.88 - 500 = $30.88

I would take the first option i)$500 at 5% simple interest for two years.

Explanation:

i) $500 at 5% simple interest for two years.

Initial amount, P = $ 500

Rate of interest, r = 0.05

Time in years, t = 2

Therefore Final amount A = P(1 + rt) = 500(1 + (0.05 2) ) = $550

Therefore Interest = 550 - 500 = $50

ii) $500 at 3% compounded monthly for 2 years

Initial or Principal Amount, P = $500

Rate of interest, r =0.03

number of conversions, m = 12

Time in years, t = 3

Therefore final amount, = $530.88

Therefore Interest = 530.88 - 500 = $30.88

I would take the first option i) $500 at 5% simple interest for two years.