Question

Nicole deposits $30,000 into an account that pays simple interest at a rate of 2% per year.

Chris deposits $30,000 into an account that also pays 2% interest per year. But it is compounded annually.
Find the interest Nicole and Chris earn during each of the first three years.
Then decide who earns more interest for each year.
Assume there are no withdrawals and no additional deposits.
Year
First
Second
Third
Interest Nicole earns
(Simple interest)
$0
$0
$0
Interest Chris earns
(Interest compounded annually)
$
$
$0
Who earns more interest?
Nicole earns more.
Chris earns more.
O They earn the same amount.
Nicole earns more.
Chris earns more.
O They earn the same amount.
O Nicole earns more.
O Chris earns more.
O They earn the same amount.

Answer 1

After first year:

Nicole: $30,000(.02) = $600

Chris: $30,000(.02) = $600

Both earn the same amount of interest.

After second year:

Nicole: $30,000(.02)(2) = $1,200

Chris: $30,000(1.02² - 1) = $1,212

Chris earns more interest.

After third year:

Nicole: $30,000(.02)(3) = $1,800

Chris: $30,000(1.02³ - 1) = $1,836.24

Chris earns more interest.