Two savings accounts each start with a $200 principal and have interest rate of 5%. One account earns simple interest and the other is compound annually. Which account will earn more interest over 10 years? How much more?

Formula for Simple Interest: I = PRT

P = Principal

R = Interest rate per time period in decimal

T = number of time periods

Now you just substitute: 200 x 0.05x 10 = $100 interest

Formula for Compound Interest: A = P (1 + r) ^n

A = Final amount to which investment grows

P = Principal

r = interest rate per period as decimal

n = number of corresponding periods

Substitute: 200 (1 + 0.05) ^10 = $325.80 (rounded)

Now compare and the compound interest earns more by $225.80