compound interest.

Question

$15, 000 is invested for 1 year. find the future value based on simple interest of 8% and 8% interest compounded every 6 months. then find the difference between the two.

Answer 1

Simple interest:

 

i = p · r · t, where i = interest, p = principal, r = rate, t = time

i = (15000)(0.08)(1)

i = 1200

 

Compound interest:

 

A = p(1 + r/n)^nt, where A = total amount at end of period, n = number of calculations (here n = 2)

A = 15000(1 + 0.08/2)²

A = 15000(1 + 0.04)²

A = 15000(1.04)²

A = 15000(1.0816)

A = 16224

i = A - p

i = 16224 - 15000

i = 1224

 

The compound interest is twenty-four dollars more.