Question

Consider a deposit of $10,000 made for 5 years earning 5.00% interest. How much interest was earned due to compounding? In other words, what was the difference between compounded interest and simple interest. Answer to nearest dollar.

Answer 1

Step-1:Calculation of simple interest
	Simple interest		=	Amount desposited x Interest rate x Life in Years
			=	$       10,000	x	5%	x	5
			=	$         2,500
Step-2:Calculation of compound interest
	Compound interest		=	Future value - amount deposited
			=	$       12,763	-	$       10,000
			=	$         2,763
	Working:
	Future value		=	10000*(1+0.05)^5
			=	$       12,763
Step-3:Calculation of difference between simple interest and compound interest
	Difference between simple interest and compound interest
			=	$         2,763	-	$         2,500
			=	$ 263