And deposits $20,000 into an account that pays simple interest at a rate of 2% per year Jim deposits $20,000 into an account that also pays 2% interest per year but it is compounded annually find the interest and and Jim earn during each of the first three years then decide who earns more interest for each year assume there are no withdrawals and no additional deposits

1 answer

Let's calculate the interest earned by each account for the first three years.

1) Simple Interest Account:

Year 1:
Interest earned = Principal * Rate = $20,000 * 2% = $400

Year 2:
Interest earned = Principal * Rate = $20,000 * 2% = $400

Year 3:
Interest earned = Principal * Rate = $20,000 * 2% = $400

Total interest earned after three years = $400 + $400 + $400 = $1,200

2) Compound Interest Account:

Year 1:
Interest earned = Principal * Rate = $20,000 * 2% = $400

Year 2:
Interest earned = (Principal + Year 1 Interest) * Rate = ($20,000 + $400) * 2% = $408

Year 3:
Interest earned = (Principal + Year 2 Interest) * Rate = ($20,000 + $408) * 2% = $416.16

Total interest earned after three years = $400 + $408 + $416.16 = $1,224.16

Conclusion:
After comparing the interest earned by each account for the first three years, we can see that Jim earns more interest with the compound interest account.