Determine whether an 8.3% simple interest rate or a 7.2 compound interest rate with interest compounded monthly is better investing option when $3800 is invested in four years. Enter one is an 8.3 simple interest rate is the better option enter two if a 7.2 compound rate is Compounded is a better option
To determine which option is better, we need to compare the amount of money earned using each interest rate.
For simple interest, the formula is: I = P * r * t, where I is the interest earned, P is the principal amount (the initial investment), r is the interest rate, and t is the time in years.
So, with a simple interest rate of 8.3% and an investment of $3800 over four years, the interest earned would be:
I_simple = 3800 * 0.083 * 4 = $1259.20
For compound interest, we use the formula: A = P * (1 + r/n)^(n*t), where A is the final amount, n is the number of times interest is compounded per year. In this case, interest is compounded monthly, so n = 12.
So, with a compound interest rate of 7.2% and an investment of $3800 over four years, the final amount earned would be:
A_compound = 3800 * (1 + 0.072/12)^(12*4) = $4738.92
Comparing the two amounts, we see that the compound interest option yields a higher return. Therefore, the better investing option in this case is the 7.2% compound interest rate. So the answer is two.