Question

First Simple Bank pays 9.4 percent simple interest on its investment accounts. First Complex Bank pays interest on its accounts compounded annually. What rate should First Complex Bank set if it wants to match First Simple Bank over an investment horizon of 14 years?

Answer 1

Answer:

0.06182 or 6.182%

Explanation:

The total interest rate over 14 years paid by First Simple Bank is given by:

$I_S = 0.094*14 = 1.316$

The rate required by First Complex Bank, assuming compounded interest over 14 years, to match the interested paid by First Simple Bank is:

$I_C = (1+r)^{14}-1=I_S\\(1+r)^{14}-1=1.316\\r=\sqrt[14]{2.316}-1\\ r=0.06182 = 6.182\%$

First Complex Bank should set an interest rate of 6.182%.