To find the difference in interest earnings, we can calculate the interest earned for each option and then subtract the interest earned from option 1 from the interest earned from option 2.
Option 1:
Simple interest formula: I = P * r * t
Where:
I = interest earned
P = principal amount (initial investment)
r = interest rate
t = time in years
I1 = 7000 * 0.15 * 3
I1 = $3,150
Option 2:
Compound interest formula: A = P * (1 + r/n)^(n*t)
Where:
A = ending balance (including interest)
P = principal amount (initial investment)
r = interest rate
n = number of times interest is compounded per year
t = time in years
A2 = 7000 * (1 + 0.12/4)^(4*3)
A2 = $9,356.69
Interest earned in option 2:
I2 = A2 - P
I2 = $9,356.69 - $7,000
I2 = $2,356.69
Difference in interest earnings:
Difference = I2 - I1
Difference = $2,356.69 - $3,150
Difference = -$793.31
The difference in interest earnings is -$793.31, which means that option 1 (15% simple interest) will give Angel more financial returns compared to option 2 (12% compound interest, compounded quarterly).
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.
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