I want to put some money in the bank for 5 years. My bank provides simple intere

Question

I want to put some money in the bank for 5 years. My bank provides simple interest at 3.25% per year, but I cannot determine if this is a better deal than a competing bank offering 3.25% compound interest without knowing the compounding period.

Choose the correct statement

A. The statement makes sense because if the compounding period is only one year then each year the compounded account will earn the same amount as the simple account.

B. The statement does not make sense because, even if the account is only compounded once per year, after the first year, the amount of money earning interest is greater in the compounded account than in the simple interest account.

Explanation / Answer

Solution:

Option (b) will be correct one

The statement does not make sense because, even if the account is only compounded once per year, after the first year, the amount of money earning interest is greater in the compounded account than in the simple interest account

statement does not make sense because, even if the account is only compounded once per year, after the first year, the amount of money earning interest is greater in the compounded account than in the simple interest account

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