You are given a choice of taking the simple interest on $100 comma 000 invested for 3 years at a rate of 5 % or the interest on $100 comma 000 invested for 3 years at an interest rate of 5 % compounded quarterly. Which investment earns the greater amount of interest? Give the difference between the amounts of interest earned by the two investments.

Option two provides with the higher interest.

Explanation:

Giving the following information:

Option 1:

Present value = 100,000

Number of years = 3

Interest rate = 0.05

Option 2:

Present value = 100,000

Number of years = 3

i = 0.05/4 = 0.0125

To calculate the interest for each option, we need to use the following formula:

Interest = PV * (1+i) ^n - PV

Option 1:

Interest = 100,000 * (1.05^3) - 100,000 = $15,762.5

Option 2:

Interest = 100,000 * (1.0125^12) - 100,000 = $16,075.45