Angel wants to invest $7,000 for 3 years. He has two investing options.
Option 1: Investing with a 15% simple interest rate.
Option 2: Investing with a 12% compound interest rate, with interest being compounded quarterly.
Find the difference in interest earnings to help Angel determine which investing option will give more financial returns.
(1 point)
The difference in interest earnings is $__, and option__is the better investing option
To calculate the interest earnings for Option 1, we can use the simple interest formula:
Interest = Principal x Rate x Time
Interest = $7,000 x 0.15 x 3
Interest = $3150
For Option 2, we need to use the compound interest formula:
Compound Interest = Principal x (1 + Rate/100)^(n x t) - Principal
Where:
Principal = $7,000
Rate = 12% = 0.12
n = number of times interest is compounded per year = 4 (quarterly)
t = time in years = 3
Compound Interest = $7,000 x (1 + 0.12/4)^(4 x 3) - $7,000
Compound Interest = $7,000 x (1 + 0.03)^12 - $7,000
Compound Interest = $7,000 x 1.03^12 - $7,000
Compound Interest = $7,000 x 1.425087 - $7,000
Compound Interest = $9,975.61 - $7,000
Compound Interest = $2975.61
The difference in interest earnings is $2975.61 - $3150 = -$174.39
Therefore, option 1 is the better investing option since it has higher interest earnings.