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Question

To make CDs look more attractive than they really are, some banks advertise that their rates are higher than their competitors’ rates; however, the fine print says that the rate is a simple interest rate. If a person deposits $10,000 at 10% per year simple interest, what compound interest rate would yield the same amount of money in 3 years?

Solution

VerifiedAnswered 2 years ago

Answered 2 years ago

Step 1

1 of 3First we need to calculate future amount using simple interest after 3 years at a interest rate of 10%.

text${\text{\P}}$ = $10,000

text${\text{\i}}$ = 10%

n = 3

F = P + Pni

F = $10,000 + $10,000(3)(0.1)

F = 13,000

Now, we use compound interest formula as follows, while givens are:

Total due after n years = $13,000

text${\text{\P}}$ = $10,000

n = 3

text${\text{\i}}$ = ?

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