Account A is a compound interest account and Account B is si

Account A is a compound interest account and Account B is simple interest account. Both accounts have a rate of 4%. If you plan to take your money out in 3 years, which of the following is true, all else equal?

a. Account A is better becuase it is less expensive.

b. Account A is better because it will accumulate more interest.

c. Account B is better because it will accumulate more interest.

d. You are indifferent between the two accounts.

Solution

Let the principal be $100

Hence for Account A:

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

A=$100*(1.04)^3

=$100*1.124864

=$112.4864

Hence interest earned=A-P

=$112.4864-$100

=$12.4864

For Account B:

Simple interest=Principal*Interest rate*Time period

=$100*4%*3

=$12.

Hence the correct option is B.

This is because in case of compound interest;interest is earned on interest and hence more interest is earned unlike simple interest.