Beatrice invests $1,000 in an account that pays 4% simple interest. How much more could she have earned over a five-year period if the interest had compounded annually?
A) $15.45
B) $15.97
C) $16.65
D) $17.09
E) $21.67

Question

Quizplus · Accepted Answer

Using the simple interest formula, Beatrice would earn $200 in interest over 5 years (1000 x 0.04 x 5 = 200). If the interest had compounded annually, the formula would be A=P(1+r/n)^(n*t), where A is the amount of money accumulated after the time period, P is the principal amount, r is the annual rate of interest, n is the number of times the interest is compounded, and t is the number of years. Using this formula, Beatrice would earn $216.65 over 5 years ((1000 x (1+0.04/1)^(1*5)) - 1000 = 216.65). The difference between the two amounts is $16.65, so the correct answer is (C).

Beatrice Invests $1,000 in an Account That Pays 4% Simple