Simple vs. Compound Interest 2-5

Question

Bank account A begins with a deposit of 2000 dollars and earns 4.75% simple interest annually.
Bank account B also begins with 2000 dollars and earns 4.75% interest compounded annually.
Bank account C begins with 2000 dollars and earns 4.75% APR compounded monthly.

Years: 1
Account A:
Account B:
Account C:

Years:5
Account A:
Account B:
Account C:

Years: 10
Account A:
Account B:
Account C:

Which of the three investments is best for the investor?

Account A?
Account C?
Account B?

Answer 1

What is your question? What don't you understand? where is your work?

 

Simple interest is calculated as Principal * interest rate * time

 

So for bank A: Year 1

Year 1:$2,000 * .0475 x 1 = $95

Year 5: $2,000 * .0475 * 5 = $475

 

Compound interest  means that the interest earned in a previous period starts earning interest in future periods.

 

the formula is FV = PV(1 + r/n)^tn where FV is the amount accumulated, PV is the initial investment, r is the annual interest rate, n is the number of compounding period per year. So for Bank B

 

Year 1. $95

Year 5. $522.32

 

And for Bank C

 

Year 1. $97.10

Year 5. $534.96