Question 140939
Which do you think pays more: 4.25% simple interest for 3 years or 4% interest compounded semi-annually for the same amount of time? Explain.
:
Here is the compound interest formula: A = P*{{{(1+r/n)^(nt)}}}
where
P = principal amt
A = resulting amt
r = interest rate (decimal)
t = time in years
n = no. of periods per year
:
We only need to use the multiplier which is: {{{(1+r/n)^(nt)}}}
:
For 4.25 % simple interest (compounded once a yr) for 3 yrs
{{{(1+.0425/1)^(1*3)}}} =  {{{(1.0425)^3}}} = 1.139955
:
For 4% compounded twice a year, for 3 yrs
{{{(1+4/2)^(2*3)}}} = {{{(1.02)^6}}} = 1.126162
:
The one with the highest multiplier pays more. (4.25%)
:
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