Question

two savings accounts each start with a $200 principal and have interest rate of 5%. One account earns simple interest and the other is compound annually. Which account will earn more interest over 10 years? How much more?

Answer 1

Explanation:

you would add $220 and 5%

After you get your answer you should get 1185

Answer 2

Formula for Simple Interest: I = PRT

P = Principal
R = Interest rate per time period in decimal
T = number of time periods

Now you just substitute: 200 x 0.05x 10 = $100 interest

Formula for Compound Interest: A = P(1 + r)^n

A = Final amount to which investment grows
P = Principal
r= interest rate per period as decimal
n= number of corresponding periods

Substitute: 200(1 + 0.05)^10 = $325.80 (rounded)

Now compare and the compound interest earns more by $225.80