You can invest in an account that pays simple interest or an account that pays compound interest

Finance Aug 05, 2020

You can invest in an account that pays simple interest or an account that pays compound interest. In either case, you plan to invest $730 today and both accounts have an annual interest rate of 4.9%. How much more interest will you receive in the 8th year in the account that pays compound interest? Round your answer to the nearest penny, and do not type the "$" sign.

Expert Solution

Simple Interest for 8th year = Initial Principal*Interest Rate = 730*4.9% = 35.77

Compound Interest for 8th year = Account Balance after 7 years*Interest Rate = [Initial Principal*{(1+Interest Rate)^Number of years}]*Interest Rate = [730*{(1+0.049)^7}]*4.9% = 1020.35*4.9% = 49.997 = 50

Therefore, More Interest = Compound Interest-Simple Interest = 50-35.77 = 14.23(approximately)

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