Steve is panning to open a savings account either at Quartely Bank or at Simple

Question

Steve is panning to open a savings account either at Quartely Bank or at Simple Bank. Quarterly Bank is offering an APR of 5.5% compounded quarterly. Simple Bank is offering a simple interest rate of 5.5%. Which Bank offers the better deal? Support your answer with an explanation. Steve is panning to open a savings account either at Quartely Bank or at Simple Bank. Quarterly Bank is offering an APR of 5.5% compounded quarterly. Simple Bank is offering a simple interest rate of 5.5%. Which Bank offers the better deal? Support your answer with an explanation.

Explanation / Answer

To compare the different between two banks and to suggest which bank offers the better deal, we need to calculate the interest that we get in each of the banks.

We can say that simple bank system is better than Quarterly bank system as usually at same interest rate simple interest rate gives more interest compared to APR. If you want you earnings in savings bank account simple bank system is better than APR quarterly bank

Lets say you have an amount of $1000 with you as savings. Now we will see the interest that we get in each of the banks in a year.

Consider the case of Simple Bank.

It offers a simple interest rate of 5.5%.

Interest=(Principle * Interest rate* Time in Years* No.of times calculated in a year)/100

Here Principle=1000, Interest rate=5.5%, Time in Years=1, No.of times=1

Therefore Interest=(1000*5.5*1*1)=5500/100=55

In simple bank you will get an interest of $55

Now consider the case of quarterly bank which offeres APR (Annual Percentage Rate) of 5.5%

In addition APR is compounded quarterly

To find the interest rate equivalent to simple interest rate k for given the APR r,

Here q is no.of times compounded in a year which is 4 here

k=4*(1+5.5/100)(1/4)-1)=5.39%

which is definitely less than simple banking system.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.