Simple Interest: Interest is calculated once per year on the original amount borrowed or invested. The interest does not become part of the amount borrowed or owed (the principal).
Compound Interest: Interest is calculated once per period on the current amount borrowed or invested. Each period, the interest becomes a part of the principal.
A youth group has a yard sale to raise money for a charity. The group earns $800 but decides to put its money in the bank for a while. Calculate the amount of money the group will have if:
a. Cool Bank pays simple interest at a rate of 4%, and the youth group leaves the money in for 3 years.
b. Hot Bank pays an interest rate of 3% compounded annually, and the youth group leaves the money in for 5 years.
c. If the youth group needs the money quickly, which is the better choice? Why?Problem Set Sample Solutions
1. $250 is invested at a bank that pays 7% simple interest. Calculate the amount of money in the account after 1 year, 3 years, 7 years, and 20 years.
2. $325 is borrowed from a bank that charges 4% interest compounded annually. How much is owed after 1 year, 3 years, 7 years, and 20 years?
3. Joseph has to $10,000 invest. He can go to Yankee Bank that pays 5% simple interest or Met Bank that pays 4% interest compounded annually. After how many years will Met Bank be the better choice?
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