Compound Interest

Question

How much more interest is earned on an investment of $12,585 at 3.5% interest over 5 years if the interest is compounded annually rather than earning simple interest?

Answer 1

Simple Interest = Principal*rate*time

Principal = $12,585

Rate = 3.5%

Time = 5 years

Interest = (12585*3.5%*5) = $2,202;38

Compound interest:

Principal = $12,585

At the end of 5 years compounded = 12,585*(1+3.5%)^5 = $14,947

(above we're using Future value formula: FV = PV*(1+r)^t

The difference between the future value and the present value is the interest, therefore

$14,947 - $12,585 = $2,362.03

Difference in interest = Compound - Simple

= $2,362.03 - $2,202.38 = $159.66

You get $159.66 more when it's compounded instead of simple interest.