Answer:
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 [tex]P[(1 + i)^{n} - 1][/tex], where P=Principle , i=interest rate, n=number of compounding periods for a year
Final value for option 2 = $200 + [tex]200[(1 + 0.05)^{10years} - 1][/tex] = $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"
