Question

If $4000 is invested at 6% interest for 5 years, approximately how much more interest would be earned if it is compounded daily than if it is calculated as simple interest?

A. $560
B. $600
C. $625
D. $650

Answer 1

The difference in interest earned with compound interest compared to simple interest is approximately $567.25, which is closest to option A ($560).

Step-by-step explanation:

To calculate the difference in interest earned with compound interest compared to simple interest, we need to find the amount of interest earned in each case.

For simple interest, we use the formula: I = P * r * t.

For compound interest, we use the formula: A = P * (1 + r/n)^(n*t) - P, where A is the total amount, P is the principal amount, r is the annual interest rate, n is the number of times interest is compounded per year, and t is the time in years.

Plugging in the values, we have:

• Simple Interest: I = 4000 * 0.06 * 5 = $1200
• Compound Interest: A = 4000 * (1 + 0.06/365)^(365*5) - 4000 = $1767.25

The difference in interest earned is approximately $567.25, which is closest to option A ($560).