Simple Interest versus Compound Interest [LO1] First City Bank pays 7 percent simple interest on its savings account balances, whereas Second City Bank pays 7 percent interest compounded annually. If you made a $6,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of nine years?

You would have $1,251 more money in second city bank than the first city bank.

Explanation:

First city bank pays 7% simple interest.

Interest = (PRT)/100

Interest = (6000 * 7 * 9)/100 = 378000/100 = $3,780

Amount in first city bank after 9 years = 6000 + 3780 = $9,780

The second city bank pays 7% interest compounded annually, so we would find the amount after 9 years.

P = $6,000

R = 7% = 7/100 = 0.07

T = 9

A = P(1 + R) ^ {t}\\

A = 6000(1 + 0.07)^ {9}\\

A = 6000(1.07)^{9}\\

A = 6000 * 1.838459212420\\

A = 11030.75527452\\

A = 11031

Amount after 9 years in second city bank = $11,031

Difference between first city bank and second city bank: 11031 - 9780 = 1251.

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