Question

Simple Interest versus Compound Interest First City Bank pays 10% simple interest on its savings account balances; whereas, Second City Bank pays 10% interest compounded annually. If you made $6,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 10 years; and, what is the amount for First City Bank? What is the simple interest amount for First City Bank; What is the amount of compound interest for Second City Bank? So, which bank would earn the most interest/money

Answer 1

Formula for simple interest is : Principal * Rate * Time period

Principal = $6000, Rate = 10% and time period = 10

Simple Interest for First City Bank is :

Interest = $6000 * 10% * 10

Interest = $6000

Amount after 10 years in First City Bank is :

Amount = Principal + Simple interest

Amount = $6000 + $6000 = $12000

Formula for compound interest is :

Amount = Principal * (1+ R%)ⁿ

Amount in Second City Bank after 10 years is:

Amount = $6000 (1+ 10%)¹⁰

Amount = $6000 (1 + 0.1)¹⁰

Amount = $6000 (1.1)¹⁰

Amount = $6000 * 2.5937424601

Amount = $15562.46

Compound Interest for Second City Bank = Amount after 10 years - Principal

Compound Interest for Second City Bank = $15562.46 - $6000

Compound Interest for Second City Bank = $9562.46

At the end of 10 years

Money earned in First City Bank (Simple Interest) = $6000

Money earned in Second City Bank (Compound Interest) = $9562.46

So, money earned in Second City Bank is greater than that earned in First City Bank by :

$9562.46 - $6000 = $3562.46