Question

First Simple Bank pays 9.8 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to match First Simple Bank over an investment horizon of 8 years? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Let's assume the investment account amount equal to be 1,000

First Simple bank pays the amount after 8 years with simple interest of 9.8%

Interest payable = 1,000*0.098*8

=784

Total amount payable = Initial investment account balance + Simple intersest

Total amount payable = 1,000 + 784

Total amount payable = 1,784

To match First simple bank simple interest payment, The First complex bank with annual compound interest is to be

Total amount payable of First simple bank = Total amount payable of First complex bank

1,784 = 1000(1+r)^8

(1+r)^8 = 1.784

1+r =(1.784)^1/8

1+r = 1.0750393378616

r = 1.0750393378616-1

r = 0.0750393378616

r = 7.50%

7.50% rate should the First Complex bank set if it wants to match First Simple Bank over an investment horizon of 8 years.