Question

MAC bank pays compounded interest of 5% per annum. BAC bank pays simple interest of 5.1% per annum. Which is the better option for a $100 deposit for 2 yrs.

Answer 1

BAC bank pays 5.1% simple interest per annum. This means that every year you are awarded 5.1% of your principle as interest.

MAC bank pays compounded interest of 5% per annum. This means that every year you are awarded 5% of your total balance as interest.

So at BAC bank, we can use the simple interest formula: principle p times interest i * time t, p*i*t
$100*.051*2 = $10.20 interest over 2 years.

At MAC bank, we use the compounded interest formula: principle p times one plus interest i to the power time t minus principle,
p*(1+i)^t - p
$100*(1.05)^2 - $100 = $10.25 interest over 2 years