Question

First City Bank pays 6 percent simple interest on its savings account balances, whereas Second City Bank pays 6 percent interest compounded annually. If you made a deposit of $9,000 in each bank, how much more money would you earn from your Second City Bank account at the end of 12 years?

Answer 1

Answer:

The second bank provides with the higher future value.

Explanation:

Giving the following information:

First City Bank:

pays 6 percent simple interest

Second City Bank:

pays 6 percent interest compounded annually.

You deposited $9,000 in each bank.

The simple interest means that the interest gain each year doesn't accumulate. Compounded interest accumulates the interest to the principal, generation more interest each year.

First City Bank:

To calculate the ending value, we need to use the following formula:

FV= Principal + (principal*interest rate*n)

FV= 9,000 + (9,000*0.06*12)= $15,480

Second City Bank:

FV= Principal*(1+i)^n

FV= 9,000*(1.06^12)= $18,109.77

The second bank provides with the higher future value.