Compare simple interest at 3% and compound interest at 2% with interest being compounded monthly when $750 is invested for 1 year to determine which interest earning type offers more financial gains.(1 point)
Responses
Compound interest at 2% offers more financial gains.
Compound interest at 2% offers more financial gains.
Simple interest at 3% offers more financial gains.
Simple interest at 3% offers more financial gains.
Both simple interest at 3% and compound interest at 2% with interest being compounded monthly offer the same amount of financial gain after 1 year of investment.
Both simple interest at 3% and compound interest at 2% with interest being compounded monthly offer the same amount of financial gain after 1 year of investment.
There is not enough information to determine which interest earning type offers more financial gains.
Compound interest at 2% offers more financial gains.
In order to compare the two types of interest, we need to calculate the amount of money earned in each case.
For simple interest at 3%, the formula is: Interest = Principal * Rate * Time. Therefore, the amount of money earned in simple interest after 1 year is:
Interest = $750 * 0.03 * 1 = $22.50.
For compound interest at 2%, the formula is: Amount = Principal * (1 + Rate/Number of Compounding Periods)^(Number of Compounding Periods * Time). In this case, the interest is compounded monthly, so the formula becomes:
Amount = $750 * (1 + 0.02/12)^(12 * 1).
Calculating this equation gives:
Amount = $750 * (1.00167)^(12) ≈ $765.10.
Comparing the two amounts, it is clear that compound interest at 2% offers more financial gains compared to simple interest at 3%. Therefore, the correct answer is that compound interest at 2% offers more financial gains.