Question

Paul has $2,400 in a savings account earning 3.4% simple interest. How much more interest would he earn in 5 years if the interest were compounded annually?

Answer 1

Amount using compound interest = 2400(1 + 0.034)^5 = 2400(1.034)^5 = 2400(1.1820) = $2,836.70

Amount using simple interest = 2400(1 + 5 x 0.034) = 2400(1 + 0.17) = 2400(1.17) = $2,808

Difference = $2,836.70 - $2,808 = $28.70

Therefore, he will earn $28.70 more interest in 5 years if the interest were compounded annually .