Question 1114966: jill wants to save to buy a car she has a choice between two different banks . one bank is offering a simple interest rate of 4.5% and the other is offering a rate of 4.5% compounded annually. Which is the better deal ?
Answer by Theo(13342)   (Show Source):
You can put this solution on YOUR website! the one that offers compound interest should get her more money.
let's assume she puts 10,000 in each account, and she is saving for 10 years.
the account that gives her simple interest will give her .045 * 10,000 * 10 = 4500 in interest, which gives her a total of 14,500 at the end of 10 years.
the account that gives her annual compound interest will give her 10,000 * 1.045 ^ 10 = 15,529.69422 at the end of the 10 years.
the difference is that she is earning interest on her interest in the annual compound account, while she is only earning interest on her principal in the simple interest account.
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