Compounding: Trish Harris has deposited $2,500 today in an account paying 6 percent interest annually. What would be the simple interest earned on this investment in five years? If the account paid compound interest, what would be the interest-on-interest in five years?
A) $750; $95.56
B) $150; $845.56
C) $150; $95.56
D) $95.56; $845.56

Question

Quizplus · Accepted Answer

Simple interest is calculated as Principal x Rate x Time, which is $2,500 x 0.06 x 5 = $750. For compound interest, the total amount after 5 years is $2,500 x (1 + 0.06)^5 = $3,348.56. The compound interest earned is $3,348.56 - $2,500 = $848.56. The interest-on-interest is the compound interest minus the simple interest, which is $848.56 - $750 = $98.56. However, the closest option is $95.56, likely due to rounding differences.

Compounding: Trish Harris Has Deposited $2,500 Today in an Account