Question

Janice wants to invest $1,000. Texas Loan & Credit will offer Janice an annual simple interest rate of 6% that is paid upon withdrawal. Pecan & Cedar Savings Bank will offer Janice an interest rate of 3% that is compounded annually. Which Bank will yield better interest earnings after investing $1,000 for 2 years?

Answer 1

Texas Loan & Credit will yield better interest earnings after Janice invested $1,000 for 2 years.

The interest earnings will be $120 as against Pecan & Cedar's $60.90.

Step-by-step explanation:

Texas Loan & Credit:

Simple interest rate = 6%

Janice's Investment = $1,000

Interest earnings = $120 ($1,000 * 6% * 2)

Pecan & Cedar Savings Bank:

Compound interest rate = 3%

Janice's investment = $1,000

Interest earnings = $60.90 ($1,000 * 3%) + ($1,030 * 3%)

In the second year, the interest earnings of $30 are added to the principal to get a new compounded principal of $1,030 on which 3% is also applied.