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 $
investing option.
, and option is the better
For option 1, the interest earned can be calculated using the formula:
Simple Interest = Principal * Rate * Time
Therefore, the interest earned for option 1 is:
Interest 1 = $7,000 * 0.15 * 3 = $3,150
For option 2, the interest earned can be calculated using the formula:
Compound Interest = Principal * (1 + Rate/Number of Compounding periods)^(Number of Compounding periods * Time)
In this case, the interest is compounded quarterly, so the number of compounding periods is 4.
Therefore, the interest earned for option 2 is:
Interest 2 = $7,000 * (1 + 0.12/4)^(4 * 3) - $7,000 = $3,602.20 - $7,000 = -$3,397.80
The difference in interest earnings can be calculated by subtracting the interest earned for option 1 from the interest earned for option 2:
Difference in interest earnings = Interest 2 - Interest 1 = -$3,397.80 - $3,150 = -$6,547.80
Therefore, the difference in interest earnings is -$6,547.80.
Since the interest earned for option 2 is negative, it means that option 2 would actually result in a loss of money compared to option 1. Therefore, option 1 is the better investing option.