Question

Frank goes to his local bank to inquire about investment plans. The bank offers two different plans Plan Y: This plan offers a fixed return of 6.5% annually on the initial investment Plan Z: This plan offers a return of 6% on the initial amount, compounded annually. If Frank invests $1,000 for six years, which plan would offer him better returns?

Answer 1

In order to calculate the interest for plan Y, let's use the simple interest formula:

`I=P\cdot i\cdot t_{}`

Where I is the interest, P is the principle (initial investment), i is the interest rate and t is the amount of time.

Using P = 1000, i = 0.065 and t = 6, we have:

`I=1000\cdot0.065\cdot6=390`

Now, for plan Z, we use the compound interest formula:

`I+P=P(1+i)^t_{}_{}`

Using now i = 0.06:

`\begin{gathered} I+1000=1000\cdot(1+0.06)^6_{} \\ I+1000=1000\cdot1.06^6 \\ I+1000=1000\cdot1.41852 \\ I+1000=1418.52 \\ I=418.52 \end{gathered}`

So plan Z offer better returns in these conditions.