Answer:
If the account earns annual compound interest rather than annual simple interest, the account earns extra $1955.62
Step-by-step explanation:
Given :
Principal amount P = $5000
Annual interest rate r = 4% = 4/100 = 0.04
time t = 20 years
First we have to calculate account balance when account earns annual simple interest. We know that the formula is
A = P(1+rt)
= 5000 (1+ (0.04 x 20))
= 5000 (1.8)
= 9000
Interest earned for annual simple interest = 9000 - 5000
= 4000
Now we will calculate account balance when account earns annual compound interest. The formula is
A = P
Since here interest is compounded annually, n =1, hence we get
A = P
= 5000
= 10955.62
Interest earned for annual compound interest = 10955.62 - 5000
= 5955.62
The extra interest earned = 5955.62 - 4000
= 1955.62
Hence f the account earns annual compound interest rather than annual simple interest, the account earns extra $1955.62