Correct question reads;
Assume that you and your best friend each have $1000 to invest. You invest your money in a fund that pays 10% per year compound interest. Your friend invests her money at a bank that pays 10% per year simple interest. At the end of 1 year, the difference in the total amount for each of you is:
(a) You have $10 more than she does
(b) You have $100 more than she does
(c) You both have the same amount of money
(d) She has $10 more than you do
<u>Answer:</u>
<u>(d) She has $10 more than you do</u>
<u>Explanation</u>:
Using the compound interest formula
A= P [ (1-i)^n-1
Where P = Principal/invested amount, i = annual interest rate in percentage, and n = number of compounding periods.
<u>My compound interest is:</u>
= 1000 [ (1-0.1)^1-1
= $1000
$1,000 + $1,000 invested= $2,000 total amount received.
<u>My friend's simple interest is;</u>
To determine the total amount accrued we use the formula:
P(1 + rt) Where:
P = Invested Amount (1000)
I = Interest Amount (10,000)
r = Rate of Interest per year (10% or 0.2)
t = Time Period (1 )
= 1000 (1 + rt)
= 1000 (1 + 0.1x1)
= $1100 + $1000 invested = $2100 total amount received.
Therefore, we observe that she (my friend) has $100 more than I do.
