First Simple Bank pays 8.7 percent simple interest on its investment accounts. I
ID: 2818991 • Letter: F
Question
First Simple Bank pays 8.7 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to match First Simple Bank over an investment horizon of 9 years? Round to 2 decimal place.
First Simple Bank pays 8.7 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to match First Simple Bank over an investment horizon of 9 years? Round to 2 decimal place.
Explanation / Answer
Let principal be $1000
Hence simple interest=Principal*Interest Rate*Time Period
=$1000*8.7%*9 years
=$783
Hence future value=principal+simple interest
=(1000+783)
=$1783
Hence for First Complex Bank:
We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.
1783=1000*(1+r/100)^9
(1783/1000)^(1/9)=(1+r/100)
(1+r/100)=1.0664
r=(1.0664-1)*100
which is equal to
=6.64%(Approx).
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