Question

Two banks offer different interest rates on your deposit of $10,000 over 3 years. Bank A offers an 8% interest compounded annually and Bank B offers an 8.5% simple annual interest. Which would earn the most interest (INT) over the 3 year period, and by how much?

Answer 1

Bank A

Principal (P) = $10,000

Interest rate = 8% compounded annually

Time period = 3 years

Calculate the amount -

Amount = P(1+r)ⁿ

Amount = $10,000(1+0.08)³

Amount = $10,000(1.08)³

Amount = $10,000 * 1.259712 = $12,597.12

Interest earned = Amount - Principal = $12,597.12 - $10,000 = $2,597.12

So,

The deposit with Bank A will earn an interest of $2,597.12 in three years.

Bank B

Principal (P) = $10,000

Interest rate = 8.5%

Time period = 3 years

Bank B offers simple interest.

Calculate simple interest -

Simple interest = (P * R * T)/100 = (10,000 * 8.5 * 3)/100 = $2,550

The deposit with Bank B will earn an interest of $2,550 in three years.

Hence,

Deposit with Bank A would earn the most interest and by $47.12