An investor deposited 1000 in each of Bank X and Bank Y. Bank X credits simple interest at an annual rate of 10% for the first five years and 7% thereafter. Bank Y credits interest at an annual nominal rate of 5% compounded quarterly. The interest credited in the eighth year by Bank Y exceeds the interest credited in the eighth year by Bank X by N.

• 0.36
• 2.14
• 20.00
• 56.36
• 56.93

Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.

Solution: B

With simple interest, the deposit in Bank X earns 1000(0.07) = 70 in year 8. With compound interest, the earning in Bank Y in year 8 is

[[math]] 1000(1.0125)^{32}-1000(1.0125)^{28}=72.14. [[/math]]

The absolute difference is 2.14.

Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.