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  3. 2. simple versus compound interest financial contr

2. Simple versus compound interest Financial contracts involving investments, mortgages, loans, and so on are...

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Finance

2. 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.

Emma deposited $500 in a savings account at her bank. Her account will earn an annual simple interest rate of 9%. If she makes no additional deposits or withdrawals, how much money will she have in her account in 11 years?

$145.00

$995.00

$549.05

$1,290.21

Now, assume that Emmas savings institution modifies the terms of her account and agrees to pay 9% in compound interest on her $500 balance. All other things being equal, how much money will Emma have in her account in 11 years?

$116.12

$1,290.21

$995.00

$545.00

Suppose Emma had deposited another $500 into a savings account at a second bank at the same time. The second bank also pays a nominal (or stated) interest rate of 9% but with quarterly compounding. Keeping everything else constant, how much money will Emma have in her account at this bank in 11 years?

$130.56

$1,330.93

$145.00

$546.54

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