Recall the equation for simple interest

Question

Recall the equation for simple interest, A=P(1+rt). Compare the amount of interest earned in 10 years for an investment of $3700 with a 7% annual simple interest rate and a 7% annual interest rate compounded monthly.

simple interest: $

compound interest: $

The compound interest investment earned $ more than the simple interest investment.

Answer 1

37000 at 10% for 7 years simple interest

A=P(1+rt) = 3700(1+.07(10)) = 3700(1.7) = $6290

the simple interest = rt =1.7(3700) = 6290-3700

= $2590

for 7% compounded monthly for 10 years

A = P(1+r/n)^nt = 3700(1+.07/12)^12(10) =about 3700(2.01)=7435.75 rounded to nearest cent

compounded interest > simple interest = 7435.75- 6290

= $1145.75

Answer 2

Hi Elo,

Simple Interest is:

A=P(1 + r)10

A= 3700(1+(0.07*10) = $6290

Compound Interest formula is:

A = P(1 + r/n)^nt

A=Total amount earned

P=Principle Investment

r=rate

n=number of compounding periods

t=time

Here:

P=3700

r=0.07

n=12--# of months in a year

t=10

A = P(1 + r/n)^nt

A=3700(1+0.07/12)^{^12*10}

A=$7435.75

Difference is 7435.75 - 6290 = $1145.75

Go for compound interest if you can get it, and I hope this helps.