Question

You want to deposit $3,000 now into a savings account for 5 years. The Northeast bank offers an APR of 12% with simple interest while the Southwest bank offers an APR of 10% with monthly compounding. Which bank would you prefer and why?

a) The Northeast bank because it offers an additional $ 229 in interest.

b) The Northeast bank because it offers an additional $ 130 in interest.

c) The Southwest bank because it offers an additional $135 in interest.

d) The Southwest bank because it offers an additional $ 70 in interest.

e) The Northeast bank because it offers an additional $ 352 in interest.

Answer #1

Computation of interest under simple interst method | |||

Interest = | |||

3000*12%*5 | 1800 | ||

Computation of interest under compounding interst rate | |||

Interest = | $ 1,935 | ||

3000*(1+10%/12)^(5*12)-3000 | |||

Additional interest = | $ 135 | ||

1935-1800 | |||

Correct answer is option - | |||

c) The Southwest bank because it offers an additional $135 in interest. | |||

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