Tyler has $1000 that he wants to put in a savings account. He wants to save the money for 6 years. After 6 years he plans to take the money out and spend it on college. He looks at two different banks, and they offer him different interest options.
Bank A offers Tyler 4% simple interest. How much would Tyler’s investment be worth after 6 years in this account? Show your calculations below.
Bank B offers Tyler 3% interest compounded annually. How much would Tyler’s investment be worth after 6 years in this account? Show your calculations below.
In which bank should Tyler place the $1000 he is saving for college?
Bank A:
To calculate the worth of Tyler's investment after 6 years with a 4% simple interest rate, we will use the formula:
Worth = Principal + (Principal * Interest * Time)
Where:
Principal = $1000
Interest = 4% = 0.04
Time = 6 years
Worth = 1000 + (1000 * 0.04 * 6)
Worth = 1000 + 240
Worth = $1240
Bank B:
To calculate the worth of Tyler's investment after 6 years with a 3% interest compounded annually, we will use the formula:
Worth = Principal * (1 + Interest)^Time
Where:
Principal = $1000
Interest = 3% = 0.03
Time = 6 years
Worth = 1000 * (1 + 0.03)^6
Worth = 1000 * (1.03)^6
Worth ≈ 1000 * 1.191
Worth ≈ $1191
Comparing the worth of Tyler's investment in both banks, it is clear that Bank A offers a higher return after 6 years. Therefore, Tyler should place his $1000 in Bank A.