Four years ago, Rachels father gave her $500,000. However, instead of providing her with the cash, her father decided to open a certificate of deposit (savings account) earning 7.15% interest compounded annually. Based on the amount of money invested and the 7.15% interest rate, Rachel calculated how much money she should have now using simple interest. Rachels friend, Chandler, insists that her calculations are wrong because she is not accounting for compound interest.

a. Explain what compound interest means in 1-2 sentences

b. Show Rachel the difference between a $500,000 investment earning simple 7.15% interest and a $500,000 investment earning 7.15% compounded interest by building a table like the one below (you may also refer to table 5.1 in your textbook).

Year - Beginning amount - Simple interest - Compounded interest - Total interest earned - Ending amount

c.Calculate total simple interest, total compounded interest and total interest earned (the sum of the corresponding columns in the table above). How much more did Rachel earn by having her interest compounded annually?

Answer rating: 100% (QA)

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