Question

Questions and Problems: 1. Simple Interest versus Compound Interest [LO1] First City Bank pays 9 percent simple interest on its savings account balances, whereas Second City Bank pays 9 percent interest compounded annually. If you made a deposit of $7,500 in each bank, how much more money would you earn from your Second City Bank account at the end of eight years? 2. Calculating Future Values (LO1] For each of the following compute the future value Present Value Interest Years Future Value Rate $ 2,328 11 1396 tional 7.513 7 9% 74.381 14 12% 192,050 16 696 3. Calculating Present Values (LO2] For each of the following compute the present value: Present Value Years Interest Rate Future Value 13 946 $ 16,832 4 7% 48,310 29 13% 886,073 40 2196 550.164

Answer 1

Answer : 1)  $2,044.22

Calculations

Calculation of Amount accumulated at the end of 8 years when first city bank pays 9% simple interest :

Simple Interest = (Principal * Rate * Number of Years)

= (7500 * 9% * 8)

= 5400

Amount = Principle + Simple Interest

= 7500 + 5400

= 12900

Calculation of Amount accumulated at the end of 8 years when Second city bank pays 9% compound interest compounded annually :

Amount = Principal * (1 + r) ^n

where r is the rate of interest per period = 9% or 0.09

n is the number of periods i.e 8

Amount = 7500 * (1 + 0.09) ^8

= 7500 * 1.992563

= 14944.22

Excess Money earned from second city Bank = Amount in Second City Bank - Amount in First City Bank

= 14944.22 - 12900

= 2044.22

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