Question

2. You have some money to invest in one of two accounts. The first account pays5% simple Interest, and the second pays 4% compound Interest. How wouldyou decide which account to use? Discuss your answer with a classmate.

Answer 1

ANSWER

The compound interest (if the interest is compounded for more than 10 years)

EXPLANATION

Given;

The simple interest function will be greater in the beginning (at the initial stage of investment), but the compound interest equation will overtake the simple after some years.

For the simple interest;

Amount will be principal plus the interest earned;

$A=P+P·0.05·t=P\left(1+.05t\right)$

While for the compound interest;

lance in the compound interest account will be the principal amount multiplied by the factor representing the growth due to interest. The amount in the account will be the principal amount multiplied by the growth factor due to interest.

$A=P\left(1+0.04\right)^t=P·1.04^t$

Therefore, The compound interest will yield more, if the interest is compounded for more than 10 years).