Question

One thousand dollars is borrowed for one year at an interest rate of 1% per month (12% compounded monthly). If the same sum of money could be borrowed for the same period at an interest rate of 12% compounded yearly, how much could be saved in interest charges?

Answer 1

Answer:

$6.83

Explanation:

Intereest rate = future value - present value

The formula for calculating future value:

FV = P (1 + r/m)^mn

FV = Future value  

P = Present value  

R = interest rate  

N = number of years  

m = number of compounding per year

$1000 compounded monthly = 1000(1.01)^12 = $1126.83

Interest = $1126.83 - $1000 = $126.83

$1000 compounded yearly = 1000(1.12) = $1120

Interest = $1120 - $1000 = $120

Amount saved on interest charges = $126.83 - $120 = $6.83