Problem 5-1 Simple Interest versus Compound Interest [LO1] First City Bank pays

Question

Problem 5-1 Simple Interest versus Compound Interest [LO1]

First City Bank pays 8 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest compounded annually.

If you made a $55,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 8 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

First City Bank pays 8 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest compounded annually.

Explanation / Answer

Amount in first city bank:
final=initial+(initial*rate*interest)
=55000+(55000*8%*8)=90200
second city bank:
final=initial*(1+r)^n
=55000*(1+8%)^8
=101801.16
the difference=101801.16-90200=11601.16

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