Compare the interest amount earned by 5250 for 5 years at 10

Compare the interest amount earned by $5,250 for 5 years at 10% simple interest with that earned by the same amount for 4 years at 12% compounded annually. ?·1.

Solution

Simple interest = Principle * Interest rate * time

                                                          =5250 * .10 * 5

                                                           = 2625

FV using compounded interest = 5250 * (1 + .12) ^ 4

                                                   = 5250 * 1.573519

                                                     = 8260.98

Interest earned = 8260.98 – 5250 = 3010.98

So interest earned from compound interest in more than the simple interest

Difference = 3010.98 – 2625 = 385.98

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