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Question

Rhonda deposits $500 into an account that earns 5% intrest compound annually. Susan deposits the same ammount into an account that earns 5% simple intrest. Compare the account balences after 2 years. Whose greater

Answer 1

Rhonda gets 5% interest in the first year.  5% of $500 is $25, so at the end of the first year she has $525.  The second year she get 5% of the new total, $525.  That's because that's the way compound interest works.  You get interest based on the CURRENT amount, not the initial amount.  5% of $525 is $26.25.  Add that to the amount she had after one year and you get 5$51.25.

 

Susan also gets 5% of 500 in the first year and ends up with $525 after one year.  But in the second year she gets 5% of $500 again, because with simple interest you only get interest based on the initial amount.  So that's another $25 to add, for a total of $550.

 

So Rhonda has more.