Jeff invests $3,000 in an account that pays 7% simple interest. How much more could he have earned over a 20-year period if the interest had compounded annually?
A) $2,840.00
B) $3,212.12
C) $3,778.54
D) $4,087.18
E) $4,409.05

Question

Quizplus · Accepted Answer

With simple interest, Jeff would earn $3,000 * 0.07 * 20 = $4,200 over 20 years, making his total $7,200. With compound interest, the formula is A = P(1 + r/n)^(nt), where A is the amount, P is the principal, r is the annual interest rate, n is the number of times the interest is compounded per year, and t is the time in years. Since the interest is compounded annually, n = 1. So, A = $3,000(1 + 0.07/1)^(1*20) = $3,000(1.07)^20 ≈ $11,609.05. The difference between compound and simple interest over 20 years is $11,609.05 - $7,200 = $4,409.05.

Jeff Invests $3,000 in an Account That Pays 7% Simple