Question

George is considering two different investment options. The first option offers 7.4% per year simple interest on the initial deposit. The second ...

Answer 1

George is considering two different investment options. The first option offers 7.4% per year simple interest on the initial deposit. The second option offers a 6.5% interest rate but is compounded quartely. He may not withdraw any of the money for three years after the intial deposit. Once the minimum 3 years is reached, he can choose to withdraw his money or continue to collect interest. Suppose that George opens one of each type of account and deposits $10,000 into each.

Answer:

Compound interest is better than simple interest after a period of four years.

Step-by-step explanation:

Simple interest  = P * R * T  /100

P = $ 10,000

R = 7.4 %

T ≥ 3

Compound interest  = P(1 + R/100)ⁿ - P

P = $ 10,000

R = 6.5/4 %  ( Quarterly)

T ≥ 12  12 quarters

Time                                    Simple interest         Compound interest

3 Years (12 Quarters)         '

Time                        Simple Interest Compound interest

3 Years 12 Quarters     2220                            2134

3.25 Years 13 Quarters     2405                            2331

3.5 Years 14 Quarters     2590                            2532

3.75 Years 15 Quarters     2775                           2735

4 Years 16 Quarters    2960                              2942

4.25 Years 17 Quarters    3145                                3153

4.5 Year 18 Quarters    3330                               3366

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