Question

Riley wants to buy a car and has a choice between two different banks. One bank is offering a simple interest rate of 4.5% and the other bank is offering a rate of 4.5% compounded annually. Which is the better deal?

Answer 1

The bank that offers compound interest should get Riley more money.

let's assume he puts 10,000 in each account, and he is saving for 10 years.

the account that gives him simple interest will give him .045 * 10,000 * 10 = 4500 in interest, which gives him a total of 14,500 at the end of 10 years.

the account that gives him annual compound interest will give him 10,000 * 1.045 ^ 10 = 15,529.69422 at the end of the 10 years.

the difference is that he is earning interest on his interest in the annual compound account, while he is only earning interest on his principal in the simple interest account.

Hope this helps. Good luck !!