Question

First Simple Bank pays 6.4 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to match First Simple Bank over an investment horizon of 10 years?

Answer 1

Answer:

rate set by first complex bank is  = 5.07 %

Explanation:

given data

simple interest = 6.4 %

investment time = 10 year

solution

we consider here first total interest on the amount $100  paid as simple interest is for 10 year will be

interest = $100 × 6.4% × 10

interest = $64

so future value will be = $100 + $64 = $164

so now we consider rate of interest = r

so that now we apply here future value formula

future value = investment × $(1+r)^{t}$   ...............1

$164 = $100 × $(1+r)^{10}$  

1.64 =   $(1+r)^{10}$

solve it we get

r =  0.05071

so rate set by first complex bank is  = 5.07 %