Question

Planters Bank pays 5 percent simple interest on its savings account balances, whereas Centura Bank pays 5 percent compounded annually. If you made a $12,000 deposit in each bank, how much more money would you earn from your Centura Bank account at the end of 20 years?

Answer 1

Answer:

$7,839.57

Explanation:

Given:

Amount deposited = $12,000

Time = 20 years

Interest paid by Planters Bank = 5%

Now,

Simple interest is given as:

Interest = Principle × Rate × Time

or

Interest = $12,000 × 0.05 × 20

or

interest = $12,000

therefore

the total amount at the end of 20 years = $12,000 + $12,000 = $24,000

now for the Centura Bank

Interest rate = 5% compounded annually

The compound interest is given as:

Final amount = Principle × ( 1 + rate )ⁿ

here, n is the time period

therefore,

Final amount = $12,000 × ( 1 + 0.05 )²⁰

or

Final amount = $31,839.57

The difference in amount = $31,839.57 - $24,000 = $7,839.57