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 the better option, we need to calculate the amount of money earned from each investment option after 4 years.
For the 8.3% simple interest rate, we can use the formula:
Simple Interest = Principal × Rate × Time
Simple Interest = $3,800 × 0.083 × 4 = $1,257.60
The amount earned from the 8.3% simple interest rate after 4 years is $1,257.60.
For the 7.2% compound interest rate with interest compounded monthly, we can use the formula:
Compound Interest = Principal × (1 + Rate/12)^(12×Time)
Compound Interest = $3,800 × (1 + 0.072/12)^(12×4) = $4,609.80
The amount earned from the 7.2% compound interest rate after 4 years is $4,609.80.
Comparing the two options, we find that the 7.2% compound interest rate with interest compounded monthly is a better investing option.
Therefore, the answer is 2.