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?

Creeperhissboom
Apr 19, 2018

#1**+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 !

ElectricPavlov
Apr 19, 2018

#1**+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

#2**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%.

Guest Apr 19, 2018

#3**+1 **

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

ElectricPavlov
Apr 19, 2018