The question is incomplete:
Student Friendly Bank pays a simple interest rate of 2.5% per year. Neighborhood Bank pays a compound interest rate of 2.1% per year, compounded monthly.
Which bank will provide the largest balance if you plan to invest $10,000 for 10 years? For 20 years?
Answer:
-The bank that provides the largest balance if you plan to invest $10,000 for 10 years is Student Friendly Bank.
-The bank that provides the largest balance if you plan to invest $10,000 for 20 years is Neighborhood Bank.
Step-by-step explanation:
First, you have to calculate the balance if you invest the money in Student Friendly Bank. To do it, you have to use the simple interest formula to calculate the future value:
FV=PV(1+rt)
FV= future value
PV= present value
r= rate
t=time
-10 years:
FV= 10,000(1+(0.025*10))
FV= 10,000(1+0.25)
FV=10,000(1.25)
FV=12,500
-20 years:
FV= 10,000(1+(0.025*20))
FV= 10,000(1+0.5)
FV=10,000(1.5)
FV=15,000
Second, you have to calculate the balance if you invest the money in Student Neighborhood Bank. To do it, you have to use the compound interest formula to calculate the future value:
FV=PV(1+(r/m))^mt
FV= future value
PV= present value
r= rate
t=time
m=number compounding periods per year
-10 years:
FV=10,000*(1+(0.021/12))^12*10
FV=10,000*(1+0.00175)^120
FV=10,000*(1.00175)^120
FV=12,334.5
-20 years:
FV=10,000*(1+(0.021/12))^12*20
FV=10,000*(1+0.00175)^240
FV=10,000*(1.00175)^240
FV=15,214
According to this, the bank that provides the largest balance if you plan to invest $10,000 for 10 years is Student Friendly Bank because it will provide $12,500 and Neighborhood Bank will provide $12,334.5.
The bank that provides the largest balance if you plan to invest $10,000 for 20 years is Neighborhood Bank because it will provide $15,214 and Student Friendly Bank will provide $15,000.
