Hi All,
This question requires knowledge of the formulas for Simple Interest and Compound Interest:
Simple Interest = Principal x (1 + RT)
Compound Interest = Principal x (1 + R)^T
Where R is the yearly interest rate and T is the number of years. When compounding MORE than once a year, you must divide R by the number of periods and multiply T by the same number of periods.
We're asked for the DIFFERENCE in the amount of interest that is generated under two different situations. We can TEST VALUES to answer this question. IF... X = 20...
$1,000 at 20% compounded semi-annually (meaning twice a year) =
$1,000 x (1.1)^2 =
$1,000 x (1.21) = $1210
$1,000 at 10% compounded annually =
$1,000 x (1.2)^1 =
$1200
The difference is $10, so we're looking for an answer that equals 10 when we plug X=20 into it. There's only one answer that matches....
Final Answer:
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Rich
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