Daniel's bank pays a simple interest while Claire's bank pays a compound interest
Simple interest rate is the interest that is paid only on the amount deposited. This means that the bank does not pays interest on the interest already accrued. This differs from compound interest where the bank pays interest on the principal and the interest rate already accrued.
Simple interest = amount deposited x time x interest rate
10,000 x 0.05 x 1 = $500
This means that every year, interest paid would be $500
Compound interest in year 1 = 500
Return on investment with compounding in year 2 =
500 x (1.05)^2 = 525
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