You deposit $1,000 in your bank account. (LO5-1) a. If the bank pays 4% simple interest, how much will you accumulate in your account after 10 years? b. How much will you accumulate if the bank pays compound interest?

Simple interest - $1,400

Compound interest - $1,480.24

Explanation:

Simple interest is the interest earn only on he principal invested.

For example, with a rate of 10% simple interest, if I invest $10,000 for 2 years. Then my interest will be:

SI = 10,000 * 10% * 2 = $200

Accumulated amount can be calculated using this formula:

F. V = P + (P R * T)

FV = 10,000 + (10,000 * 10% * 2)

= 10,200

Compound Interest: Under this arrangement, both the principal and interest would earn interest. Unlike the simple, any interest themselves would earn interest so far they are not withdrawn.

To compute compound interest

Year 1 = 10000 * 10% = 100

Year 2 = (10000*10%) + (100 * 10%) = 110

Total interest = 100 + 110 = 210

Note that the interest in year 2 is higher for compound interest than for simple interest.

Accumulated amount for compound interest is done as follows:

F. V = P * (1+r) ^n

So lets apply this these concepts to our question:

a) Simple interest:

Accumulated amount (Future Value):

F. V = P + (P * R * T)

F. V = $1000 + (1000 * 4% * 10)

= $1,400

b) Compound Interest

F. V = P * (1+r) ^n

F. V = 1,000 * (1+0.04) ^10

= $1480.24