Business, 27.03.2020 19:20 gibbss80stu

Simple versus compound interest

Financial contracts involving investments, mortgages, loans, and so on are based on either a fixed or a variable interest rate. Assume that fixed interest rates are used throughout this question.

Zoe deposited $900 in a savings account at her bank. Her account will earn an annual simple interest rate of 7%. If she makes no additional deposits or withdrawals, how much money will she have in her account in thirteen years?

a. $1,719.00

b. $2,168.86

c. $967.41

d. $163.00

Now, assume that Zoe's savings institution modifies the terms of her account and agrees to pay 7% in compound interest on her $900 balance. All other things being equal, how much money will Zoe have in her account in thirteen years?

a. $963.00

b. $151.82

c. $2,168.86

d. $1,719.00

Suppose Zoe had deposited another $900 into a savings account at a second bank at the same time. The second bank also pays a nominal (or stated) interest rate of 7% but with quarterly compounding. Keeping everything else constant, how much money will Zoe have in her account at this bank in thirteen years?

a. $166.16

b. $964.67

c. $163.00

d. $2,218.36

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Simple versus compound interest

Financial contracts involving investments, mortgages, l...

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