Question

1. Beatrice invests $1,000 in an account that pays 5 percent simple interest. How much more could she have earned over a 10-year period if the interest had compounded annually? A. $135.42

B. $135.97

C. $121.67

D. $117.09

E. $128.89

2.

You are Mr. Matthew Stafford’s agent and are negotiating a five year contract. The Lion’s make four offers: (a) $15 million a year for the next 5 years. (b) one-time payment of $95 million five years from now. (c) one-time payment of $50 million today. (d) $13.50 million at the beginning of each year for the next five years.  Which offer would you recommend that Mr. Stafford accept if the interest rate was 12.50%

Offer (a)

Offer (b)

Offer (c)

Offer (d)

None of the above

Answer 1

1)

Total simple interest earned over 10 years	$      500.00	=1000*10*5%
Total compound interest earned over 10 years	$      628.89	=1000*(1+5%)^10-1000
Difference (in favor of compounding)	$      128.89
Hence, correct option is E. $128.89