Question

How much more interest is earned on an investment of $12,585 at 3.5% interest over 5 years if the interest is compounded annually rather than earning simple interest?
a.
They are the same.
b.
$159.65
c.
$2,362.03
d.
$12,744.65

Answer 1

Compute the difference: P[(1+r)^t − (1+rt)] with P = 12,585, r = 0.035, t = 5.

1.035^5 ≈ 1.1876863056, and 1 + rt = 1 + 0.035·5 = 1.175.
Difference ≈ 12,585·(1.1876863056 − 1.175) ≈ 12,585·0.0126863056 ≈ 159.66.

So about $159.65 (choice b).