G Suppose that you place $ 200 $200 into an account that pays a simple interest rate of 5 % 5% for 10 years and another $200 into an account offering a compound interest rate of 5 5 % for 10 years. Compute the difference between the final values of the two accounts.

The difference in the final values is $25.78

Explanation:

Simple interest is calculated on the principal amount of a loan.

Compound interest is calculated on the principal amount and also on the accumulated interest of previous periods.

Simple interest formula = P * i * n, where P=Principle , i=interest rate, n=term of the loan

Final value for option 1 = $200 + ($200 * 5% * 10 years) = $300

Compound interest formula is , where P=Principle , i=interest rate, n=number of compounding periods for a year

Final value for option 2 = $200 + = $325.78

The difference in the final values is $25.78. The compound interest option values more over time because on top of the interest earned on the principal amount, it also earns "interest on interest"

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