Erin deposits $1500 into an account that pays an interest rate of 4% compounded annually.
Rachel deposits $1500 into an account that pays a simple annual interest rate of 4%.
Compare the balances of the two accounts after 5 years. Who earns more money in interest?
*HINT: Find the interest for Each person!
Erin deposits $1500 into an account that pays an interest rate of 4% compounded annually.
Rachel deposits $1500 into an account that pays a simple annual interest rate of 4%.
Compare the balances of the two accounts after 5 years. Who earns more money in interest?
*HINT: Find the interest for Each person!
Erin
Rachel
Compound Interest for Erin after 5 years:
A = P(1 + r/n)^(nt)
A = 1500(1 + 0.04/1)^(1*5)
A = 1500(1.04)^5
A = 1500(1.21665290241)
A = 1824.98
Interest = A - P
Interest = 1824.98 - 1500
Interest = $324.98
Rachel
Simple Interest for Rachel after 5 years:
I = P*r*t
I = 1500*0.04*5
I = 300
In this case, Erin earns more money in interest. Erin earns $324.98 in interest, while Rachel earns $300 in interest.