Financial Literacy Unit Test 11 of 1511 of 15 Items Question Aria is investing $6,700 of her savings from her summer job for her college fund. She is planning to invest the amount for 3 years and can choose between simple interest at 6.5% and compound interest at 6%. Find the difference between the two interest earning types to help Aria decide which investing option is best for her.(1 point) Responses Aria should invest with 6% compound interest because it will result in $86.76 more in interest earnings. Aria should invest with 6% compound interest because it will result in $86.76 more in interest earnings. Aria should invest with 6.5% simple interest because it will result in $187.26 more in interest earnings. Aria should invest with 6.5% simple interest because it will result in $187.26 more in interest earnings. Aria should invest with 6% compound interest because it will result in $73.81 more in interest earnings. Aria should invest with 6% compound interest because it will result in $73.81 more in interest earnings. Aria should invest with 6.5% simple interest because it will result in $26.69 more in interest earnings.
1 answer
For simple interest at 6.5%:
Interest earned = Principal (P) x Rate (R) x Time (T)
= $6,700 x 6.5% x 3 years
= $1,083.50
For compound interest at 6%:
Interest earned = P(1 + r/n)^(nt) - P
Where:
P = principal amount = $6,700
r = annual interest rate (as a decimal) = 6% = 0.06
n = number of times interest is compounded per year (assume annually) = 1
t = number of years = 3
Interest earned = $6,700(1 + 0.06/1)^(1*3) - $6,700
= $6,700(1.06)^3 - $6,700
= $6,700(1.191016) - $6,700
= $7,994.10 - $6,700
= $1,294.10
The difference between the two interest earning types is:
$1,294.10 - $1,083.50 = $210.60
Therefore, the correct answer is: Aria should invest with 6% compound interest because it will result in $210.60 more in interest earnings.