Question

Walter is investing $5,000in an account paying 6.75 percent annually for three years. What is the interest-on-interestif interest is compounded?Hint: Find the interest earned using compound interest and simple interest. The difference between them isyour answer.

Step 1

Principal invested, P = $ 5,000

Interest rate, R = 6.75%

Time, T = 3 years

As a first step, we will find the interest earned simple interest.

Then we will find the interest under compound interest method.

FInally, we will take the difference between them. That should be our answer.

Step 2

Simple interest, I_{S} = P x R x T = $ 5,000 x 6.75% x 3 = $ 1,012.50

Step 3

Compound interest, IC = P x [(1 + R)T – 1] = $ 5,000 x [(1 ...

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