So here is our case, our friend John needs our help.
John has saved a thousand dollars and now he wants to invest this money into a bank account.
John is considering two different banks, the first bank bank A is offering six percent per annum simple
interest rate for five years on a fixed deposit, whereas Bank B is offering five point five percent
of compound interest rate per annum on the investment.
So our task is to help John and deciding which bank is offering more value to him.
We will use Excel to help John.
So first, let's identify key information from this problem statement.
So our principal amount in both of the cases, Bank A and Bank B is thousand dollars.
The rate of interest, which is denoted by a small R, is six percent or zero point zero six in case
of bank A.
And in case of Bank B, this small R is equal to zero point zero five five or 5.5 percent in bank.
We have a simple interest rate and in Bank B, we have a compound interest rate.
The all time period in both of the banks is of five years, so we have to invest our money for five
years.
Now we have all the parameters that we need to calculate the future values from both of these banks.
So let's start with Benki, which is offering a simple interest rate.
First, we will calculate the interest generated by Bank A..
So in year one, in case of simple interest rate, the interest generated is being to our.
That is.
This cell into this are.
No principal will remain same for all the five years and therefore the interest generated per year will
also be same.
So we will expand this formula to all the years.
And before expanding, let's first fix the referencing or use absolute referencing.
Now, we have fixed the cell, now we can expand our formula.
So you can see in bank one in each year, we are getting sixty dollars as interest, this is because
bank is offering a simple interest rate.
Now, let's move on to the Bank B, which is offering a compound interest rate on our investment.
So if you remember, in case of compound interest rate, we get interest payment on principal as well
as previous interest payments.
So that's why we have created two more columns in this case, or IPE and NewBay or LPI will be the combination
of principal amount plus any interest that is generated before this time period.
And new NewBay will be this OEP plus the interest rate of this year, so far this year, one over OEP
will be present only because there is no previous interest and we are just starting our own.
Now, interest generated will be this or IPE.
And to the rate that is zero point five five.
If ifI.
If we hit enter, we will get the interest rate.
Now, at the end of First-Tier, our total piece will be our previous B plus the interest generated.
Now we can use this new puppy to calculate interest generated for year two, so for year to OLP will
be.
This previous year, NUPE.
So just to device and compound interest rate, we get interest on principal as well as previous interest.
That's why our Oraibi is the sum of principal less previous interest.
Now, in the second year, total interest generated will be this Oraibi.
And to.
Don't restrict.
Again, our new puppy for the next period will be this OEP less dangerous, senator.
Now, all of our formulas are now fixed and we can expand the selection.
So you can see that in year three over Oraibi is one one one three, which is the new four time period
two and the interest is are and to this or OEP and the new puppy will be the sum of these two values.
So now we have calculated all the interest generated by Bank A and Bank B in case of simple interest
and compound interest respectively.
Now let's look at what is the total sum that our friend John will be taking home after the end of five
years.
That will be the sum of principal amount.
Plus, all the interest generated during the five year period.
If we calculate it, we can see that the sum is thirteen hundred.
If John invest in bank a thousand dollars after five years, he will be getting thirteen hundred dollars.
Now, let's calculate the same amount for Bank B as well, we will calculate the sum of B.
That is the initial investment, plus all the interest generated in the five year, Peter.
You can see that if John invest in Bank B thousand dollars, he will be getting thirteen hundred and
seven dollars at the end of a five year period.
So John should invest in Bank B because Bank B is giving a higher return on investment.
Now, one important thing here is to note is Bank E was offering higher percentage value as compared
to Bank B, but just because Bank B was offering compound interest rate instead of simple interest rate,
John is getting a higher return from Bank B.
So it is very important to see whether the interest rate is simple, the interest rate or compound interest
rate before comparing the numeric value of interest rate.