Jamie deposits $1,000 into an account that pays 4% interest compounded annually. Chris deposits $1,000 into an account that pays 4% simple interest. Both deposits were made today. At the end of five years, Chris will have more money in his account than Jamie has in hers.

Question

Quizplus · Accepted Answer

With compound interest, Jamie's account will grow faster than Chris's account because the interest earned each year is added to the principal, which increases the amount of interest earned in subsequent years. In contrast, simple interest does not take into account the compounding effect, so Chris's account will grow linearly and will have less money after five years compared to Jamie's account.

Jamie Deposits $1,000 into an Account That Pays 4% Interest