Question

Tristan wants to buy a car and has a choice between two different banks. One bank is offering a simple interest rate of 3% and the other bank is offering a rate of 2.5% compounded annually. If Tristan decides to deposit $7,000 for 4 years, which bank would be the better deal? 1. a simple interest rate of 3% 2. a compound interest rate of 2.5%

Answer 1

The bank offering simple interest at rate of 3% for four years

Explanation:

Hello,

To find out which deal would be better, we have to find how much accrued on the simple and compound interest.

Data;

Principal (P) = $7,000

Time = 4 years

Simple interest rate = 3%

S.I = PRT / 100

S.I = (7000 × 3 × 4) / 100

S.I = $840

In four years, he would have $7000 + $840 = $7840.

For compound interest,

C.I = P(1 + r/n)^nt

Where n = number of time compounded = 1 (since it's annually)

rate = 2.5% = 2.5/ 100 = 0.025

C.I = 7000(1 + 0.025/1)⁽¹*⁴⁾

C.I = 7000 (1 + 0.025)⁴

C.I = 7000×(1.025)⁴

C.I = 7000 × 1.1038

C.I = $7726.6

In four years he would have $7,726.6

After calculating and evaluating both option, it's advisable for him to select the bank offering a simple interest of 3% for four years