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Diana can either invest 20000 dollars for 4 years with a simple interest rate of 6% or an interest rate of 7% which compounds quarterly. How many more dollars, rounded to the nearest dollar, would she get with the better interest rate than with the worse one?

 Apr 19, 2018

Best Answer 

 #1
avatar+17183 
+1

FV = PV (1+i)^n 

 

First scenario  

FV = 20,000 (1.06)^4    If compounded annually

  or just  20,000 + 4*(20000*.06)    If only 6% for the entire four years.

 

Second scenario

FV = 20,000 (1+ .07/4)^16

 

I'll let you crunch the numbers to compute the differences !

 Apr 19, 2018
edited by ElectricPavlov  Apr 19, 2018
 #1
avatar+17183 
+1
Best Answer

FV = PV (1+i)^n 

 

First scenario  

FV = 20,000 (1.06)^4    If compounded annually

  or just  20,000 + 4*(20000*.06)    If only 6% for the entire four years.

 

Second scenario

FV = 20,000 (1+ .07/4)^16

 

I'll let you crunch the numbers to compute the differences !

ElectricPavlov Apr 19, 2018
edited by ElectricPavlov  Apr 19, 2018
 #2
avatar
0

EP:

The first one is SIMPLE interest:

$20,000 x 0.06 x 4 =$4,800 - simple interest for 4 years.

 

$20,000 x 1.06^4 =25,249.54 - $20,000 =$5,249.54 - This is annual compounded interest @6%.

 Apr 19, 2018
 #3
avatar+17183 
+1

Thanx..... I realized that soon after I posted it and 'fixed' it!!   D'Oh!

ElectricPavlov  Apr 19, 2018

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