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:
Simple Interest = Principal (Investment) * Rate * Time
For Option 1:
Principal = $7,000
Rate = 15% = 0.15
Time = 3 years
Simple Interest = $7,000 * 0.15 * 3 = $3,150
Now, let's calculate the interest earnings for Option 2. Since compound interest is being calculated quarterly, we need to use the compound interest formula:
Compound Interest = Principal * (1 + Rate/Number of Compounding Periods)^(Number of Compounding Periods * Time)
For Option 2:
Principal = $7,000
Rate = 12% = 0.12
Number of Compounding Periods = 4 (quarterly)
Time = 3 years
Compound Interest = $7,000 * (1 + 0.12/4)^(4 * 3) = $7,000 * (1 + 0.03)^12 = $7,000 * 1.03^12 ≈ $9,367.28
The difference in interest earnings is the compound interest earnings minus the simple interest earnings:
Difference = $9,367.28 - $3,150 ≈ $6,217.28
Therefore, the difference in interest earnings is $6,217.28, and Option 2 is the better investing option.