Hey guest! Let's start with some basic background knowledge of types of interest:
there are two main types, simple and compound. With simple interest, given a quantity:
\(x\), and in interest rate of \(r\%\) per year, we have that every year, the interest amount is:
\(x * r\%\). In other words, the amount paid every year(if we're talking about an interest on payment) is the exact same constant value.
Compound interest however, given the same variables, is a bit different.
Compound interest is "compounded"(hence the name) and added on to the previous year(or whatever metric of time used). The formula for compound interest is then typically defined:
\(A = P(1+\frac{r}{n})^{nt}\)
Where A = Amount paid
P = The principal, or the initial amount first paid
R = Interest rate as a decimal
N = The number of times the interest is compounded per unit of time "t"
T = Time(in this example, years).
Here's a great website for reference on compound interest:
https://www.thecalculatorsite.com/articles/finance/compound-interest-formula.php
Getting to the problem itself:
A)
The interest that Sue gets with an investment of 2300 pounds and an interest rate of 2.4% a year over 3 years is:
\(A = 2300(1+\frac{0.024}1)^{3*1} = 2300(1.024)^3 = 2300(1.073741824) = 2469.6061952\)
For Bill, he invests 1800 pounds at an interest of 3.4% per year.
Our equation is then:
\(A = 1800(1+\frac{0.034}1)^{3*1} = 1800(1.034)^3 = 1800(1.105507304) = 1989.9131472\)
Of course, both of these answers are using calculators.
B)
To solve this, we figure out the compound interest for Bill after 2 years, and then multiply that amount by (1 + 0.04), which represents the 4 percent compound interest rate added on to that.
Sue:
We have already that Sue has an interest payment of 2469.6061952 after 3 years
Now, moving on to Bill:
By our previous formula:
\(\)
\(A = 1800(1.034)^2 = 1800(1.069156) = 1924.4808\)
We then multiply this value by 1.04 to represent a 4 percent interest rate(4% = 0.04, so 1+ 0.04 represents a 4 percent compounded interest).
\(1924.4808 * 1.04 = 2001.460032\)
Clearly, this is less than Sue's amount after 3 years, so the answer is then Sue