Question

Penny makes deposits into two separate accounts for 5 years: option A: $800; 6% annual simple interest option B: $800; 6% annual compound interest. A. What is the interest earned on option A? B. What is the total value of option A? C. What is the interest earned on option B? D. What is the total value on option B? E. Which is the better option?

Answer 1

A) P = 240

B) P + Po = 1040

C) P = 270.58

D) P+Po = 1070.58

E) Option B (compound interest) is better, as it generates more interest for the same inicial value, rate of interest and time

Explanation:

The formula for simple interest is:

P = Po*r*t

Where P is the interest earned, Po is the inicial value, r is the rate of interest and t is the time.

The formula for compound interest is:

P+Po = Po*(1+r)^t

So we have that:

A) P = 800*0.06*5 = 240

B) P + Po = 800 + 240 = 1040

C) P+Po = 800*(1+0.06)^5 = 1070.58 -> P = 1070.58 - 800 = 270.58

D) P+Po = 1070.58

E) Option B (compound interest) is better, as it generates more interest for the same inicial value, rate of interest and time