Question

Stanley deposits $1,000 into a savings account that pays 1% interest per year. At the end of the first year, he's earned $10 in interest and there is $1,010 in the account. If the account has simple interest, the 1% interest for year two would be based off ____________. If the account has compounding interest, the 1% interest for year two would be based off ________________.(NOTE: The first choice goes in the first blank, the second choice goes in the second blank)

Answer 1

Answer:

$1000

$1010

Explanation:

The formula for determining simple interest = principal x time x interest rate

The formula for determining compound interest = future value - amount invested

FV = P (1 + r)^n

FV = Future value  

P = Present value  

R = interest rate  

N = number of years

1000 X 0.01 X 1 = $10

Given the figures in the question, the simple interest each year would be $10 based on $1000

But the compound interest in year 2 = 1000 x (1.01)^2 = 1020.10

1020.10 - 1000 = 20.1

compound interest in year 2 = 20.1 - 10 = 10.1

or

1010 x 0.01 x 1 = 10.1