Question

First City Bank pays 8 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest compounded annually.

Required:

If you made a deposit of $10,500 in each bank, how much more money would you earn from your Second City Bank account at the end of 10 years? (Do not round intermediate calculations and round your answer to 2 decimal places (e.g., 32.16).)

Difference

$

Answer 1

First city bank

Simple interest per year = Principal*Interest rate

= $10,500*8%

= $840

Simple interest earned for 8 years = 8*$840 = $6,720

Balance at the end of 8 years = $6,720 + $10,500 = $17,220

Second city bank

The future value is calculated using the bellowing formula:

FV= PV (1+r)^t

where:

FV=Future value

PV=Present value

r=rate of interest

t=time period

FV= $10,500*(1 + 0.08)^10

= $10,500*2.1589

= $22,668.71

Difference in interest earned = $22,668.71 - $17,220

= $5,448,71.