1. A retirement account is opened with an initial deposit of $8,500 and earns 8.12%
interest compounded monthly. What will the account be worth in 20 years?
What if the deposit was calculated using simple interest? Could you see the
situation in a graph? From what point one is better than the other?
Deposit = 8500
= 8.12% compounded monthly
t = 20 years
A = P (1 + r) n
k
A = 8500 (1 + 0.0812) 20*12
12
A = 8500 (1.00677)20*12
A = 8500 (1.00677)240
A = 8500 (5.0497)
A = 42,922.45
In 20 years the account will be worth $42,922.45
Simple Interest
A = P (1 + rt)
A = 8500 (1 + 0.0812 *20)
A = 8500 (2.624)
A = 22,304
If the deposit was calculated using simple interest then the answer would be $22,304.
The situation can be seen in a graph however it would be a little challenging to see the simple
interest changes reflected in the graph.
Compound interest would better in the case of an investments while the simple interest would
have been better in the case a loan was taken.
interest compounded monthly. What will the account be worth in 20 years?
What if the deposit was calculated using simple interest? Could you see the
situation in a graph? From what point one is better than the other?
Deposit = 8500
= 8.12% compounded monthly
t = 20 years
A = P (1 + r) n
k
A = 8500 (1 + 0.0812) 20*12
12
A = 8500 (1.00677)20*12
A = 8500 (1.00677)240
A = 8500 (5.0497)
A = 42,922.45
In 20 years the account will be worth $42,922.45
Simple Interest
A = P (1 + rt)
A = 8500 (1 + 0.0812 *20)
A = 8500 (2.624)
A = 22,304
If the deposit was calculated using simple interest then the answer would be $22,304.
The situation can be seen in a graph however it would be a little challenging to see the simple
interest changes reflected in the graph.
Compound interest would better in the case of an investments while the simple interest would
have been better in the case a loan was taken.
