Determine whether an 8.3% simple interest rate or a 7.2% compound interest rate with interest compounded monthly is the better investing option when $3,800 is invested for 4 years.
Enter 1 if an 8.3% simple interest rate is the better option.
Enter 2 if a 7.2% compound interest rate with interest compounded monthly is the better
option.
To determine which option is better, we need to compare the final amount of money earned with each option.
For the 8.3% simple interest rate, we can calculate the final amount using the formula:
Final Amount = Initial Amount + (Initial Amount * Interest Rate * Time)
Final Amount = $3,800 + ($3,800 * 8.3% * 4) = $4,928
For the 7.2% compound interest rate with interest compounded monthly, we can use the compound interest formula:
Final Amount = Initial Amount * (1 + (Interest Rate / 12))^ (n * Time)
Where n is the number of times interest is compounded per year.
In this case, n = 12 (monthly compounding), and time = 4 years.
Final Amount = $3,800 * (1 + (7.2% / 12))^ (12 * 4) = $5,258.38
Comparing the final amounts, we see that the 7.2% compound interest rate option yields a higher final amount of money ($5,258.38) compared to the 8.3% simple interest rate option ($4,928).
Therefore, the better option is 2. A 7.2% compound interest rate with interest compounded monthly.