Question

Abe plans to use $21,000 to open a savings account with an annual interest rate of 6%. How much more interest will he earn over 4 years if he chooses a compound interest account, with interest compounded annually, instead of a simple interest account?

Answer 1

He will make an additional $472.02 if he goes with compound instead of simple interest.

The amount of simple interest earned is:
21000 x 0.06 x 4 = 5040

The amount of compound interest earned is:
21000(1.06)^4 - 21000 = 5512.02

If you subtract those 2 numbers, you have: $472.02