Question

You are given a choice of taking the simple interest on ​$100 comma 000 invested for 3 years at a rate of 5​% or the interest on ​$100 comma 000 invested for 3 years at an interest rate of 5​% compounded quarterly. Which investment earns the greater amount of​ interest? Give the difference between the amounts of interest earned by the two investments.

Answer 1

Answer:

Option two provides with the higher interest.

Explanation:

Giving the following information:

Option 1:

Present value= 100,000

Number of years= 3

Interest rate= 0.05

Option 2:

Present value= 100,000

Number of years= 3

i= 0.05/4= 0.0125

To calculate the interest for each option, we need to use the following formula:

Interest= PV*(1+i)^n - PV

Option 1:

Interest= 100,000*(1.05^3) - 100,000= $15,762.5

Option 2:

Interest= 100,000*(1.0125^12) - 100,000= $16,075.45