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4 May, 16:27

Simple Interest versus Compound Interest [LO1] First City Bank pays 7 percent simple interest on its savings account balances, whereas Second City Bank pays 7 percent interest compounded annually. If you made a $6,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of nine years?

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  1. 4 May, 17:54
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    You would have $1,251 more money in second city bank than the first city bank.

    Explanation:

    First city bank pays 7% simple interest.

    Interest = (PRT) / 100

    Interest = (6000 * 7 * 9) / 100 = 378000/100 = $3,780

    Amount in first city bank after 9 years = 6000 + 3780 = $9,780

    The second city bank pays 7% interest compounded annually, so we would find the amount after 9 years.

    P = $6,000

    R = 7% = 7/100 = 0.07

    T = 9

    A = P (1 + R) ^ {t}//

    A = 6000 (1 + 0.07) ^ {9}//

    A = 6000 (1.07) ^{9}//

    A = 6000 * 1.838459212420//

    A = 11030.75527452//

    A = 11031

    Amount after 9 years in second city bank = $11,031

    Difference between first city bank and second city bank: 11031 - 9780 = 1251.
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