1 00:00:01,080 --> 00:00:06,280 So here is our case, our friend John needs our help. 2 00:00:07,560 --> 00:00:14,850 John has saved a thousand dollars and now he wants to invest this money into a bank account. 3 00:00:16,040 --> 00:00:25,610 John is considering two different banks, the first bank bank A is offering six percent per annum simple 4 00:00:25,610 --> 00:00:34,790 interest rate for five years on a fixed deposit, whereas Bank B is offering five point five percent 5 00:00:34,790 --> 00:00:38,660 of compound interest rate per annum on the investment. 6 00:00:40,680 --> 00:00:47,840 So our task is to help John and deciding which bank is offering more value to him. 7 00:00:49,350 --> 00:00:51,750 We will use Excel to help John. 8 00:00:53,500 --> 00:00:59,080 So first, let's identify key information from this problem statement. 9 00:01:00,640 --> 00:01:07,930 So our principal amount in both of the cases, Bank A and Bank B is thousand dollars. 10 00:01:09,380 --> 00:01:17,810 The rate of interest, which is denoted by a small R, is six percent or zero point zero six in case 11 00:01:17,810 --> 00:01:18,710 of bank A. 12 00:01:20,450 --> 00:01:31,070 And in case of Bank B, this small R is equal to zero point zero five five or 5.5 percent in bank. 13 00:01:31,280 --> 00:01:36,080 We have a simple interest rate and in Bank B, we have a compound interest rate. 14 00:01:37,730 --> 00:01:44,990 The all time period in both of the banks is of five years, so we have to invest our money for five 15 00:01:44,990 --> 00:01:45,350 years. 16 00:01:47,490 --> 00:01:55,230 Now we have all the parameters that we need to calculate the future values from both of these banks. 17 00:01:58,000 --> 00:02:03,460 So let's start with Benki, which is offering a simple interest rate. 18 00:02:05,000 --> 00:02:09,860 First, we will calculate the interest generated by Bank A.. 19 00:02:10,880 --> 00:02:18,440 So in year one, in case of simple interest rate, the interest generated is being to our. 20 00:02:20,050 --> 00:02:20,740 That is. 21 00:02:21,820 --> 00:02:24,940 This cell into this are. 22 00:02:27,960 --> 00:02:36,360 No principal will remain same for all the five years and therefore the interest generated per year will 23 00:02:36,360 --> 00:02:37,420 also be same. 24 00:02:38,310 --> 00:02:42,240 So we will expand this formula to all the years. 25 00:02:42,990 --> 00:02:49,080 And before expanding, let's first fix the referencing or use absolute referencing. 26 00:02:50,760 --> 00:02:54,360 Now, we have fixed the cell, now we can expand our formula. 27 00:02:57,080 --> 00:03:06,440 So you can see in bank one in each year, we are getting sixty dollars as interest, this is because 28 00:03:06,920 --> 00:03:10,100 bank is offering a simple interest rate. 29 00:03:12,720 --> 00:03:20,340 Now, let's move on to the Bank B, which is offering a compound interest rate on our investment. 30 00:03:22,940 --> 00:03:31,610 So if you remember, in case of compound interest rate, we get interest payment on principal as well 31 00:03:31,610 --> 00:03:34,000 as previous interest payments. 32 00:03:34,580 --> 00:03:43,670 So that's why we have created two more columns in this case, or IPE and NewBay or LPI will be the combination 33 00:03:43,670 --> 00:03:49,240 of principal amount plus any interest that is generated before this time period. 34 00:03:50,610 --> 00:03:59,760 And new NewBay will be this OEP plus the interest rate of this year, so far this year, one over OEP 35 00:03:59,760 --> 00:04:05,970 will be present only because there is no previous interest and we are just starting our own. 36 00:04:08,500 --> 00:04:12,010 Now, interest generated will be this or IPE. 37 00:04:13,510 --> 00:04:17,290 And to the rate that is zero point five five. 38 00:04:20,030 --> 00:04:20,770 If ifI. 39 00:04:27,440 --> 00:04:29,930 If we hit enter, we will get the interest rate. 40 00:04:33,640 --> 00:04:41,320 Now, at the end of First-Tier, our total piece will be our previous B plus the interest generated. 41 00:04:46,890 --> 00:04:56,220 Now we can use this new puppy to calculate interest generated for year two, so for year to OLP will 42 00:04:56,220 --> 00:04:56,520 be. 43 00:04:57,800 --> 00:05:00,550 This previous year, NUPE. 44 00:05:02,530 --> 00:05:10,280 So just to device and compound interest rate, we get interest on principal as well as previous interest. 45 00:05:10,690 --> 00:05:16,090 That's why our Oraibi is the sum of principal less previous interest. 46 00:05:17,360 --> 00:05:22,040 Now, in the second year, total interest generated will be this Oraibi. 47 00:05:25,940 --> 00:05:26,540 And to. 48 00:05:27,850 --> 00:05:28,810 Don't restrict. 49 00:05:37,600 --> 00:05:44,160 Again, our new puppy for the next period will be this OEP less dangerous, senator. 50 00:05:52,510 --> 00:05:57,580 Now, all of our formulas are now fixed and we can expand the selection. 51 00:06:02,200 --> 00:06:10,270 So you can see that in year three over Oraibi is one one one three, which is the new four time period 52 00:06:10,270 --> 00:06:20,560 two and the interest is are and to this or OEP and the new puppy will be the sum of these two values. 53 00:06:22,660 --> 00:06:31,960 So now we have calculated all the interest generated by Bank A and Bank B in case of simple interest 54 00:06:31,960 --> 00:06:34,060 and compound interest respectively. 55 00:06:34,900 --> 00:06:42,160 Now let's look at what is the total sum that our friend John will be taking home after the end of five 56 00:06:42,160 --> 00:06:42,490 years. 57 00:06:42,700 --> 00:06:45,820 That will be the sum of principal amount. 58 00:06:47,260 --> 00:06:52,410 Plus, all the interest generated during the five year period. 59 00:06:55,370 --> 00:07:01,210 If we calculate it, we can see that the sum is thirteen hundred. 60 00:07:02,440 --> 00:07:11,140 If John invest in bank a thousand dollars after five years, he will be getting thirteen hundred dollars. 61 00:07:13,000 --> 00:07:19,540 Now, let's calculate the same amount for Bank B as well, we will calculate the sum of B. 62 00:07:20,780 --> 00:07:26,600 That is the initial investment, plus all the interest generated in the five year, Peter. 63 00:07:28,860 --> 00:07:37,260 You can see that if John invest in Bank B thousand dollars, he will be getting thirteen hundred and 64 00:07:37,260 --> 00:07:40,790 seven dollars at the end of a five year period. 65 00:07:43,110 --> 00:07:50,940 So John should invest in Bank B because Bank B is giving a higher return on investment. 66 00:07:52,050 --> 00:08:01,380 Now, one important thing here is to note is Bank E was offering higher percentage value as compared 67 00:08:01,380 --> 00:08:09,720 to Bank B, but just because Bank B was offering compound interest rate instead of simple interest rate, 68 00:08:10,650 --> 00:08:14,790 John is getting a higher return from Bank B. 69 00:08:16,630 --> 00:08:23,380 So it is very important to see whether the interest rate is simple, the interest rate or compound interest 70 00:08:23,380 --> 00:08:26,920 rate before comparing the numeric value of interest rate.