Question

Homer deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Bart also deposited $3,000 this morning at 5 percent interest, compounded annually. At the end of each period, Homer will withdraw his interest earnings and put into a new account that pays 8 percent interest, compounded annually. Given this, which one of the following statements is true?
a. ​Barb will earn more interest the second year than Andy.
b. ​Andy will earn more interest in year three than Barb will.
c. ​Barb will earn more interest the first year than Andy will.
d. ​Andy will earn compound interest.
e. ​After five years, Andy and Barb will both have earned the same amount of interest.

Answer 1

Answer:

The answer is "Option a".

Explanation:

In this question, each year Barb pays back the interest received. It will add depth to its principle during the first year. In this, the actual case, the interest for $3000 at  5% for the first year = $150, would be added to $3 000, and $31,50. In the second year, Barb should gain a 5% interest on $3150. Throughout the case of Andy, the second principle will be $3000 like it was at the end of the first year. Thus, Barb's second year is going to have more interest.

• In choice b, It is wrong because Andy wants to withdraw its interest, this won't get irritated. He would also receive less interest per year than Barb.
• In choice c, Its interest would not be the same for both in the first year.
• In choice d, It is wrong because Andy wants to withdraw interest each year, no compound interest will arise.  
• In choice e, No, not that. Andy won't earn the interest compounded so, the Barb will receive the interest multiplied. Therefore, for the five-year duration, Barb can earn more interest.