Question

Elena has $500 to invest. She can put it in an account that earns 4% compounded semi-annually or in an account that earns 5% simple interest. After 2 years, how much will be in each account, including the principal?

Answer 1

compound interest = $541.21

Simple interest = $550

Explanation:

• Compound interest formula:

A = P (1 + r/n) nt

Where:

A = Future value of investment (principal + interest)

P = Principal Amount

r = Nominal Interest Rate (decimal form, 4/100= 0.04)

n= number of compounding periods in each year (2)

t= years

Replacing with the values given

A= 500 (1+ 0.04/2)^2(2)

A= $541.21

• simple interest formula:

I = p x r x t

Where:

I= interest

Replacing with the values given:

I = 500x (5/100) x 2

I = 50

Adding the interest to the amount invested.

500 + 50 = $550

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