Determine whether an 8.3% simple interest rate or a 7.2% compound interest rate with interest compounded monthly is the better investing option when $3,800 is invested for 4 years.
Enter 1 if an 8.3% simple interest rate is the better option.
Enter 2 if a 7.2% compound interest rate with interest compounded monthly is the better option.
To determine which option is better, we need to calculate the amount of money earned through each option after 4 years.
For the simple interest rate option, the formula for calculating the total amount is: Total Amount = Principal + (Principal * Interest Rate * Time)
Using this formula, the total amount earned through the 8.3% simple interest rate option can be calculated as follows:
Total Amount = 3800 + (3800 * 0.083 * 4)
Total Amount = 3800 + (1254.4)
Total Amount = 5054.4
Therefore, with an 8.3% simple interest rate, the total amount earned after 4 years would be $5,054.4.
For the compound interest rate option, the formula for calculating the total amount is: Total Amount = Principal * (1 + Interest Rate/Number of Compounding Periods)^(Number of Compounding Periods * Time)
Using this formula, the total amount earned through the 7.2% compound interest rate option can be calculated as follows:
Total Amount = 3800 * (1 + (0.072/12))^(12 * 4)
Total Amount = 3800 * (1 + 0.006)^(48)
Total Amount = 3800 * (1.006)^(48)
Total Amount = 3800 * (1.3528)
Total Amount = 5137.84
Therefore, with a 7.2% compound interest rate with interest compounding monthly, the total amount earned after 4 years would be $5,137.84.
Comparing the two amounts, we can see that the total amount earned through the 7.2% compound interest rate option is higher.
Hence, the better investing option is a 7.2% compound interest rate with interest compounded monthly.
Therefore, the answer is 2.