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25 September, 14:56

You have $2000 to deposit for 7 years and two account options. The first earns you simple interest at a rate of 4% and the second earns you compound interest (compounded annually) at a rate of 2%. Which account earns you more money?

First account (simple interest)

Second account (compound interest)

They earn you the same

Not enough information to say

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  1. 25 September, 15:22
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    First account (simple interest)

    Step-by-step explanation:

    The amount of interest earned by the first account is ...

    I = Prt = $2000·0.04·7 = $2000·0.28 = $560

    The amount in the second account at the end of 7 year is ...

    FV = P· (1+r) ^t = $2000·1.02^7 = $2297.37

    so you have earned $297.37 in interest on the second account.

    $560 is more than $297, so the First Account (simple interest) earns more money.
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