A $5,000 investment can be placed into an account that earns 10 percent simple interest for 2 years or 10 percent

BTGmoderatorDC wrote: ↑

Wed Feb 05, 2020 5:08 pm

A $5,000 investment can be placed into an account that earns 10 percent simple interest for 2 years or 10 percent compound interest for 2 years. How many additional dollars of interest will be earned by investing the $5,000 in the compound interest account?

A. 10
B. 50
C. 100
D. 200
E. 500

OA B

Source: EMPOWERgmat

Since the compounding is annual, the interest earned on $5,000 for the first year would be the same for the investment made in simple interest and in compound interest. However, unlike for the investment in simple interest, in case of the investment of $5,000 put in compound interest, the interest earned in the first year will also earn interest in second year.

Interest earned in the first year = 5,000*10% = $500.

Thus, the interest earned in the second year (additional interest) = 500*10% = $50.

The correct answer: [spoiler][/spoiler]

Hope this helps!

-Jay
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BTGmoderatorDC wrote: ↑

Wed Feb 05, 2020 5:08 pm

A $5,000 investment can be placed into an account that earns 10 percent simple interest for 2 years or 10 percent compound interest for 2 years. How many additional dollars of interest will be earned by investing the $5,000 in the compound interest account?

A. 10
B. 50
C. 100
D. 200
E. 500



OA B

Source: EMPOWERgmat

If the $5000 investment is placed into the simple interest account, the total amount of the investment after 2 years is:

5000 + 5000 x 0.1 x 2 = 5000 + 1000 = $6000

So the total amount of interest earned after 2 years is $1000.

If the $5000 investment is placed into the compound interest account, assuming the interest compounds annually, the total amount of the investment after 2 years is:

5000 x (1 + 0.1)^2 = 5000 x 1.21 = $6050

So the total amount of interest earned after 2 years is $1050.

Therefore, an additional amount of 1050 - 1000 = $50 would be earned if the money is placed into the compound interest account.

Answer: B