First City Bank pays 6 percent simple interest on its savings account balances,

Question

First City Bank pays 6 percent simple interest on its savings account balances, whereas Second City Bank pays 6 percent interest compounded annually.

If you made a $57,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 10 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

First City Bank pays 6 percent simple interest on its savings account balances, whereas Second City Bank pays 6 percent interest compounded annually.

Explanation / Answer

The simple interest per year is: $57000* .06

= $3420

So, after 12 years, you will have: $3420 * 12 = $41040 in interest.

The total balance will be $57000 + $41040 = 98040

With compound interest, we use the future value formula:

FV = PV(1 + r ) t

FV = $57000*(1.06) 12 = $114695

The difference is: $114695.2 - $98040 = $16655.20

Difference in accounts = $16655.20

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