Question

Ben is choosing between two savings accounts. Both accounts pay 3% interest. Account X pays compound interest. Account Y pays simple interest. Ben should choose account X because

A) the interest would be tax free.
B) it would pay interest on interest.
C) the interest rate would decrease over time.
D) the interest rate would increase over time.

Answer 1

B is the answer to your question

Answer 2

Ben should choose account X because B) it would pay interest on interest.

Compounding interest means that the interest earned on a certain period will also earned an interest on the next period of interest payment.

Let us assume the following data:
Principal: 1,000 ; interest rate = 3% ; term 1 year.

Simple interest = Principal * interest rate * term
S.I = 1,000 x 3% x 2 yrs = 60
Balance after 2 year = 1,000 + 60 = 1,060

Compounding Interest: Assume compounded per quarter or 4 times a year
A = P(1 + r/n)^nt
A = 1,000 (1 + 3%/4)^4x2
A = 1,000 (1.0075)^8
A = 1,000 (1.0616)
A = 1,061.60