Donald is a college student who has $4,000 in savings that he earned from his summer job.He plans to leave the $4,000 in a 6 percent certificate of deposit (CD) for three years,but his banker has asked Donald whether he wants the interest earned on the CD mailed to him at the end of each year or reinvested in the CD.Approximately how much more will Donald earn if he decides to reinvest the interest rather than withdrawing the interest income each year?
A)$14
B)$44
C)$144
D)$240

Question

Quizplus · Accepted Answer

If Donald reinvests the interest, he benefits from compound interest, meaning each year's interest earnings are added to the principal, and the new total earns interest in the following years. With a 6% annual interest rate on $4,000, the first year earns $240 in interest. If he withdraws the interest, he earns $240 each year, totaling $720 over three years. If he reinvests, the second year's interest is calculated on $4,240, and so on. The difference between compound interest and simple interest (withdrawing the interest each year) over three years is approximately $44.

Donald Is a College Student Who Has $4,000 in Savings