Answer:
2. Jennifer and Chelsea each deposit $2,000 into accounts. Jennifer
deposits her money into a savings account that accrues simple interest at a rate of 8%. Chelsea deposits her money into a savings account that accrues compound interest at a rate of 6%, compounded monthly. How much interests do they each earn at the end of five years?
Solution:
a) Jennifer's Interest is $800
b) Chelsea's Interest is $697.70
Step-by-step explanation:
a) Simple Interest Formula = Principal * Rate * Time
= $2,000 * 8% * 5 = $800
b) Compound Interest Formula =
A = P(1 + r/n})^{nt}
A = final amount
P = initial principal
r = interest rate
n = number of times interest applied per time period
t = number of time periods elapsed
Compound Interest = $697.70 ($2,000 *(6%/12)^60) - $2,000
c) Simple interest does not include the previous interest to the principal when calculating the interest for the following years. Compound interest includes the interest to the principal in calculating the next year's interest.
