Asked by Mariela Arches on Jun 10, 2024
Verified
If $20,000 was invested at 5% over five years, determine the difference if this investment was based on simple interest versus interest that was compounded annually.
Simple Interest
Interest charged exclusively on the initial borrowed amount, or on whatever portion of the principal is still outstanding.
Compounded Annually
A method of calculating interest in which the interest earned on an investment is reinvested, and new interest is earned on that interest annually.
- Understand and explain the concept of simple and compound interest.
- Calculate and compare future values of investments with different interest compounding frequencies.
Verified Answer
RJ
Ryleigh JonesJun 10, 2024
Final Answer :
Simple interest provides a future value of $25,000, while compounded annually provides $25,525.63.
Learning Objectives
- Understand and explain the concept of simple and compound interest.
- Calculate and compare future values of investments with different interest compounding frequencies.