Question

Two different banks, Bank A and Bank B, offer accounts with exactly the same annual interest rate of 6.85%. However, the account from Bank A has interest compounded monthly, whereas the account from Bank B compounds interest continuously. To decide which bank to open an account with, you calculate the amount of interest you would earn after three years from an initial deposit of $5000 in each bank’s account. How much interest would you earn from each account? Which bank’s account earns more – and how much more?

Answer 1

Solution given:

For bank A.

rate[R]=6.85%

principal [P]=$5000

time [T]=3years

now since simple interest is given by this bank

we have

Simple interest=PTR/100

=5000×6.85×3/100=$1027.5

For bank B

rate[R]=6.85%

principal [P]=$5000

time [T]=3years

now since compound interest is given by this bank

we have

compound interest=P((1+R/100)^T-1)

=$5000((1+6.85/100)³-1)=$1099.49

since

Bank B gives more interest .more amount is

1099.49-1027.5=$71.99 or $72