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Homework answers / question archive / 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

Finance

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

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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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