Bank C promises to pay a compound annual interest rate of 6 percent, while Bank S pays a 10 percent simple annual interest rate on deposits. If you deposit $1,000 in each bank, after 10 years, your deposit in Bank C equals ________, while your deposit in Bank S equals ________.
A)$1,060; $1,100
B)$1,600; $2,000
C)$1,600; $2,594
D)$1,791; $2,000

Question

Quizplus · Accepted Answer

Bank C uses the formula: FV = PV (1 + i)ⁿ, where i is the interest rate and n the number of years, so that your deposit after 10 years = $1,000 × (1.06)¹⁰ = $1,791. Bank S uses the formula: FV = P + I, where I is the sum of all the interest payments (here 10 times $100), so that our deposit after 10 years = $1,000 + $1,000 = $2,000.

Bank C Promises to Pay a Compound Annual Interest Rate