Michael has 2 options to invest $ 10,000: 1. 4% simple interest for 10 years or 2. 3.25% compound interest for 10 years. which will earn him more money?

answers:

a. option 1

b. option 2

c. they are equal

Simple interest will earn Michael more money. Hence option 1 is the correct answer

Solution:

Michael has two options to invest $10,000.

First option is 4% Simple Interest for 10 years and second option is 3.25% Compound Interest for 10 years.

We need to find out which option will earn him more money.

To find that out we have to calculate the simple interest and compound interest for the principal amount of $10,000.

Total amount using simple interest formula is:

Where,

A= total amount

P= principal amount  

R=rate of interest

and T = time.

Therefore the $10,000 on simple interest after 10 years will become

Therefore $10,000 on simple interest after 10 years will become $14000.

Now, we have to check for compound interest.

The total amount using compound interest is:

Where n is the compounding interval. Let us assume the amount is compounded annually, therefore n = 1.

Also we have to use the rate in decimal form rather than percentage form.

Therefore the rate becomes

Now substituting the values in the formula we have:

Therefore, $10,000 after compound interest for 10 years becomes $1376.89.

Comparing the total amount of Simple and compound interest, amount earned using simple interest is high

Therefore simple interest will earn him more money.

Hence option 1 is the correct answer

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