Personal Financial Literacy>Calculating and Comparing Simple and Compound Interest(TEKS.Math.8.12.D)

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Texas 8th Grade Math › Personal Financial Literacy>Calculating and Comparing Simple and Compound Interest(TEKS.Math.8.12.D)

Questions 1 - 5
1

Investment A: $1,000 at 5% simple interest for 8 years. Investment B: $1,000 at 5% compounded annually for 8 years. What is the difference in total interest earned (compound minus simple)?

$77.46

$0.00

$40.00

-$77.46

Explanation

Simple: $I=prt=1000(0.05)(8)=400$ (amount $1400$). Compound: $A=p(1+r)^t=1000(1.05)^8\approx1477.46$, so interest $\approx477.46$. Difference $=477.46-400=77.46$, and compound earns more. Compound grows faster because interest earns interest; this advantage increases with higher $r$ and longer $t$, which is why most investments use compounding.

2

Savings comparison: $500 earning 3% simple interest vs. 3% compound interest (compounded annually) over 6 years. Which earns more money over time?

Simple interest earns more

Compound interest earns more

They earn the same

Not enough information

Explanation

Simple: $I=prt=500(0.03)(6)=90$ (amount $590$). Compound: $A=500(1.03)^6\approx500(1.194052)=597.03$, so interest $\approx97.03$. Compound earns about $7.03$ more. Because $A=p(1+r)^t$ grows multiplicatively, the compound advantage increases with higher $r$ and longer $t$; real-world investments typically use compounding.

3

Investment comparison: $1,200 at 4% for 10 years. Option A uses simple interest; Option B is compounded annually. What is the difference in total account balance after 10 years (compound minus simple)?

$80.00

$480.00

$96.29

$96.00

Explanation

Simple: $I=prt=1200(0.04)(10)=480$, total $=1680$. Compound: $A=1200(1.04)^{10}\approx1200(1.480244)=1776.29$. Difference $=1776.29-1680=96.29$. Compound is larger because interest itself earns interest; the gap widens as $r$ or $t$ increase, which is why investments usually compound.

4

Investment A: $2,000 at 9% simple interest for 4 years. Investment B: $2,000 at 9% compounded annually for 4 years. Which statement is true?

Simple earns $823.20; compound earns $720.00

Both earn $720.00

Compound earns $760.00; simple earns $720.00

Compound earns $823.16; simple earns $720.00

Explanation

Simple: $I=prt=2000(0.09)(4)=720$. Compound: $A=2000(1.09)^4\approx2000(1.411582)=2823.16$, so interest $\approx823.16$. Thus compound interest is larger. Because compounding uses $A=p(1+r)^t$, its advantage grows with higher $r$ and longer $t$, which is why most investments compound.

5

Savings comparison: $750 earning 6% simple interest vs. 6% compound interest (compounded annually) over 3 years. What is the difference in total interest earned (compound minus simple)?

$135.00

$8.26

$7.50

$143.26

Explanation

Simple: $I=prt=750(0.06)(3)=135$. Compound: $A=750(1.06)^3\approx750(1.191016)=893.26$, so interest $\approx143.26$. Difference $=143.26-135=8.26$. Compound pays more because interest earns interest; the advantage increases with larger $r$ and longer $t$, which is why most real accounts compound.