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Compare the interest eamed by 59.000 for three years at 6% simple interest with interesteamed by the same amount for three ye
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Answer #1

In the given case, we have to calculate simple interest and compound interest. Further we have to see why the difference in the interest earned occurs.

(a)In case of simple interest-

1 = Ptr

where,

P= Principal amount

t= Time

r= rate of interets

Given that-

P=$9000

t= 3 years

r= 6%=0.06

I= Interest amount earned

Putting the values in the above formula, we get-

I = (9000) (3) (0.06)

=1.620

Thus the interest earned in case of simple interest is $1,620

(b) In case of compound interest

A = P(1+

where,

A= Amount earned

P=Principal Amount

r= rate of interest

n= number of times interest compounded

t= time period

Given-

P=$9000

r=6%=0.06

t= 3 years

n= 1 (Interest rate has been compounded once a year).

Putting values in the formula, we get

A = (9000)(1+ 0.06 )(1)(3

= (90001(1.191)

=10.719

Thus the amount earned in case of compound interest is $10,719

As we can see, the amount earned in case of compound interest is more than that earned in case of simple interest.

There is a difference in the amount of interest earned because compound interest allows interest from previous years to earn additional interest whereas simple interest only considers the original principal.

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