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If you have a choice to earn simple interest on $20,000 for three years at 9% or annually compounding interest at 8
If you have a choice to earn simple interest on $20,000 for three years at 9% or annually compounding interest at 8.5% for three years which one will pay more interest and by how much?
a. Compound interest by $145.78
b. Simple interest by $50.00
c. Compound interest by $122.97
d. Simple interest by $150.00
Expert Solution
In case of Simple Interest:
Simple Interest = Principal*Rate*Time
= $20,000*9%*3 years
= $5,400
Amount = Prinicipal+Simple Interest
= $20,000+$5,400
Amount = $25,400
In case of Compound Interest:
Amount = Principal*(1+Rate)^Time
= $20,000*(1+8.5%)^3
Amount = $25,545.78
Interest = Amount - Pricipal = $25,545.78-$20,000 = $5,545.78.
Difference between Simple Interest and Compound Interest:
Difference = $5,545.78-$5,400 = $145.78
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