Question

Abigail Bock is seeking to deposit an amount of $1 200 today into an interest earning account with the Nationwide Building Society for a 5-year period. The Building Society has offered her 7% p.a. interest on the account. The bank has said that she can choose between 7% simple interest or 7% compound interest where the interest is added to the account quarterly.

Required:

At the end of the fifth year approximately how much more interest would Abigail have earned in the Bank account with the most interest as compared to that with the least interest?

Answer 1

Balance at the end of 5th year

A) Simple Interest = Principal * Rate * Time

= 1200 * 7% * 5

= 420

Amount = Principal + Interest

= 1200 + 420

Amount = 1620

B) Using Compound Interest

Future value = [Present value * ( 1 + interest rate)^Number of periods ]

Number of Compounding = 4 (Quarterly)

= [1200 * ( 1 +7%/4)^(4*5)]

= [1200 * (1.0175)^20]

= 1200 * 1.41477819576

Amount = 1697.73383491

So, The Difference with Highest to lowest is  

=1697.73383491 - 1620

Difference= 77.73383491