To find the difference in interest earnings between option 1 and option 2, we need to calculate the interest earned on each option separately.
Option 1: Simple Interest
The formula for simple interest is: Interest = Principal * Rate * Time
In this case, the principal is $7,000, the rate is 15% (or 0.15), and the time is 3 years.
Interest = $7,000 * 0.15 * 3 = $3,150
Option 2: Compounded Interest
To calculate compounded interest, we can use the formula: A = P(1 + r/n)^(nt)
Where:
A = the future value of the investment
P = principal amount
r = annual interest rate (in decimal form)
n = number of times the interest is compounded per year
t = number of years
In this case, the principal is $7,000, the rate is 12% (or 0.12), the interest is compounded quarterly (so n = 4), and the time is 3 years.
A = $7,000 * (1 + 0.12/4)^(4*3)
A = $7,000 * (1 + 0.03)^12
A ≈ $7,000 * (1.03)^12
A ≈ $7,000 * 1.425484139 $\approx$ $9,978.39
To find the interest earned on option 2, we need to subtract the principal amount ($7,000) from the future value ($9,978.39):
Interest = $9,978.39 - $7,000 = $2,978.39
Now, to find the difference in interest earnings, we subtract the interest earned in option 1 from the interest earned in option 2:
Difference in interest earnings = $2,978.39 - $3,150 ≈ -$171.61
Therefore, the difference in interest earnings between the two options is approximately -$171.61. This means that option 1 (investing with a 15% simple interest rate) would give more financial returns compared to option 2 (investing with a 12% compounded interest rate, with interest being 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% compounded interest rate, with interest being compounded quarterly
find the difference in interest earning to help angel determine which investing option will give more financial returns.
1 answer