Question 996751
simple interest is paid on the original investment only.


it doesn't compound.


he invested 5000 at 4.75% per year simple interest that is paid every six months.


at the end of the first year his interest earned was .0475 * 5000 = 237.5


that was .0475 * 5000 / 2 = 118.75 for the first 6 months and the same amount for the second 6 months.


at the end of the year he had his original 5000 + 237.5 in interest for a total of 5237.5


he invests 5237.5 at 4.5% interest annually compounded monthly.


the monthly interests rate is .045/12 = .00375.


at the end of the second year he would have 5237.5 * 1.00375^12 = 5478.109834.


if he had kept the money in the simple interest account, he would have had 5000 + 2 * 237.5 = 5475.


he didn't make a lot more, but he did make more.


the difference becomes much greater the longer you keep the money invested.


for example:


30 years at 4.75% per year on 5000 yields simple interest of 7125.


30 years at 4.5% per year on 5000 compounded monthly yields interest of 14238.