Question

Grace deposits $500 into an account that earns 2.5 interest each year After the first year Grace has $512.50 in the account After the scound year Grace has 525.31 in the account and after the third year Grace has $538.44 in the account. Is this a compound or simple interest account? Explain.

Answer 1

Hey there!

The account earns 2.5% interest.

To figure out if it earns simple or compound interest, we need to figure out if the interest earned each year, simple, is the same amount or if it's increasing each year, compound.

512.50 - 500 = 12.50

525.31 - 512.50 = 12.81

538.44 - 525.31 = 13.13

Simple interest is based on the principal amount, so the amount earned each time is the same. But in compound interest, the interest previously earned is added before calculating the next period's interest, so the amount of interest earned each period is different.

So, this is a compound interest.

Hope this helps!