Problem 5-1 Simple Interest versus Compound Interest [LO1] First City Bank pays
ID: 2819760 • Letter: P
Question
Problem 5-1 Simple Interest versus Compound Interest [LO1]
First City Bank pays 8 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest compounded annually.
If you made a $55,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 8 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
First City Bank pays 8 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest compounded annually.
Explanation / Answer
Amount in first city bank:
final=initial+(initial*rate*interest)
=55000+(55000*8%*8)=90200
second city bank:
final=initial*(1+r)^n
=55000*(1+8%)^8
=101801.16
the difference=101801.16-90200=11601.16