Question

Financial Literacy: Question 2Gordon opened a savings account with an initial deposit of $1,200.His balance will earn 2.5% simple interest overy year, Balley openeda savings account with an initial deposit of $900. Her balance willearn 3.25% interest compounded annually. The deposits were madeon the same day, and no additional money will be deposited orwithdrawn from the accounts. Which statement about the balances ofGordon's account and Balley's account at the end of 6 years is true?​

Answer 1

Answer:

In 6 years form now, the balance in Gordon's account will be = {$1,200 x [1 + (2.5% x 6 years)]} = $1,380

his account will have earned = 2.5% x 6 years x $1,200 = $180 in interests over the six years

In 6 years form now, the balance in Bailey's account will be = $900 x (1 + 3.25%)⁶ = $1,090.39

his account will have earned = $190.39 in interests over the six years

Bailey's account earned more interest than Gordon's, even though his initial balance was much lower. This was due to higher interest rates and more important, because Bailey earned compound interest.