Question

Melanie invests $4,000 into an account offering 4% interest compounded annually. Gina invests $4,000 into a simple interest savings account offering a 4.5% interest rate. What is the dollar amount of the greater balance at the end of five years? Round to the nearest dollar. Use the formula A = P (1 + r) Superscript t for compound interest; Use the formula I = P r t for simple interest.

Answer 1

Melanie: A = 4000(1.04)^5 ≈ 4000(1.2166529) ≈ $4,867

Gina: simple interest = 4000 + 4000(0.045)(5) = 4000 + 900 = $4,900

The greater balance is $4,900 (Gina's), which is $33 more than Melanie's (rounded to the nearest dollar).