Question

First City Bank pays 6 percent simple interest on its savings account balances, whereas Second City Bank pays 6 percent interest compounded annually. If you made a deposit of $11,000 in each bank, how much more money would you earn from your Second City Bank account at the end of 11 years

Answer 1

Answer:

$ 2,621.28  

Explanation:

The simple interest I=P*R*T

P is the principal amount of $11,000

R is the simple interest rate of 6%

T is the number of years the interest relates to

I=$11,000*6%*11=$7260

Compound interest:

FV=PV*(1+r)^n

FV is the amount of the deposit in eleventh year

PV is the amount deposited which is $11,000

r is the rate of return of 6%

n is eleven years

FV=$11000*(1+6%)^11=$ 20,881.28  

I=FV-PV= 20,881.28-11,000=$ 9,881.28  

Difference between interest earned=$9,881.28-$ 7260 =$ 2,621.28