First City Bank pays 8 percent simple interest on its savings account balances,

Question

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 $74,000 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 final 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

Answer: Your First City Bank account is simple interest; therefore, your annual interest earned per year is:
=$74000*8%=$5920

At the end of 8 years, your First City Bank account would have earned a total amount of interest of:

=$5920*8=$47360

Therefore, your First City Bank account would have a balance of:

=$74000+$47360=$121360

Your Second City Bank account pays compound interest (compounded on an annual basis); therefore, your balance at the end of 8 years using the formula would be:

FV=PV(1+r)t

=74000(1+0.08)8

=$136969

Your Second City Bank account would have an additional $15609 in it at the end of 8 years compared to your First City Bank account:

= $136969 - $121360

=$15609

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