Question

If you invested $600 at 3% 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 $600 at 4% 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 would rather do the second option of which uses Compound interest that will give a profit of $47.85

Explanation:

In this problem we will be exploring the two formulas

1. simple interest

A= P(1+r*t)

2. compound interest

A= P(1+r/n)^nt

Where A= final amount

P= initial amount

r= rate

t= time.

n= number of periods Compounded

1.given data

P= $600

r= 3%= 3/100= 0.03

t= 2 years

A= 600(1+0.03*2)

A= 600(1+0.06)

A= 600(1.06)

A= $636

Interest = 636-600= $36

2. Given data

P= $600

r= 4%= 4/100= 0.04

n= 24

t= 2

A= 600(1+0.04/24)^24*2

A=600(1+0.0016)^48

A=600(1.0016)^48

A= 600*1.07975

A= 647.85

Interest = 647.85-600= $47.85