First Simple Bank pays 9.7 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 9
years? (Do not round intermediate calculations. Enter your
answer as a percent rounded to 2 decimal places, e.g.,
32.16.)
Interest rate %______
Let the principal amount be 100
Interest Paid by first simple bank in 9 years = 100*9.7%*9 = $87.3
Now, amount at the end of 9 years for first complex bank should be 100+87.3 = $187.3
Let x be the interest rate compounded annually
i.e. 100(1+x)9 = 187.3
(1+x)9 = 1.873
X = 7.22% (approx.)
Hence, rate the bank should set if it wants to match First Simple Bank over an investment horizon of 9 years = 7.22%
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