Question

South Central Bank pays 2.5 percent interest, compounded annually, on its savings accounts. Northern Bank pays 2.5 percent simple interest on its savings accounts. You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today. The amount you must deposit today:

will be greater if you invest with South Central Bank.

is the same regardless of which bank you choose because they both pay the same rate of interest.

is the same regardless of which bank you choose because they both pay simple interest.

will be greater if you invest with Northern Bank.

is the same regardless of which bank you choose because the time period is the same for both banks.

Answer 1

Ans will be greater if you invest with Northern Bank

Present Value at compounded annually = Investment / (1 + r)^n

                                                            = 1500 / (1 + 2.5%)^2

                                                            = 1427.72

Future Value at Simple Interest = Principal + Principal* Rate * Time

                                1500          = x + x * 2.5% * 2

                                       1.05x           = 1500

                                              x             = 1428.57

Principal Invested with Northern Bank is $ 1428.57, Principal Invested with South Central Bank is $ 1427.72